State of Microfinance in Afghanistan

Transcription

1 State of Microfinance in Afghanistan Prepared for Institute of Microfinance (InM) As part of the project on State of Microfinance in SAARC Countries By Maliha Hamid Hussein 2009

2 Disclaimer Any opinions expressed and policy suggestions proposed in the document are the author s own and do not necessarily reflect the views of Institute of Microfinance (InM). The report also does not represent the official stand of the Government of the countries studied. 2 State of Microfinance in Afghanistan

3 List of Abbreviations AFSG AKF AKRMP ARTF BRAC CFA CGAP DaB DFID FMFBA FINCA GDP I-ANDS MADERA MFI MISFA NVRA OSS PAR SAARC SHG UNODC WOCCU WWI Ariana Financial Services Group Aga Khan Foundation Aga Khan Rural Microcredit Program Afghanistan Reconstruction Trust Fund Bangladesh Rural Advancement Committee Children s Fund, Afghanistan (program of Christian Children s fund) Consultative Group to Assist the Poor Da Afghanistan Bank Department for international Development (UK) First Micro-Finance Bank Afghanistan Foundation for International Community Assistance Gross Domestic Produce Interim Afghanistan Development Strategy Mission d Aide au Development des Economies Rurales Micro Finance Institution The Microfinance Investment Support Facility for Afghanistan National Vulnerability and Risk Assessment Operational Self-Sufficiency Portfolio at Risk South Asian Association for Regional Cooperation Self-Help Groups United Nations Office on Drugs and Crime World Council of Credit Unions Women for Women International Institute of Microfinance (InM) 3

4 Table of Contents Chapter 1: Introduction and Objectives 6 Overview 6 Country Background 6 Chapter 2: History of Microfinance 9 Overview 9 The Informal Economy 9 The Growth of the Formal Micro-Finance Sector 10 The Models of Micro-Finance in Afghanistan 11 Strategies of Leading MFIs 14 Types of Products and Services 16 Chapter 3: Growth and Outreach 19 Client Outreach 19 Coverage 20 Female Clients 23 Savings 24 Chapter 4: Sustainability 26 Operational Self-Sufficiency 26 Productivity of the Sector 28 Interest Rate Policy 28 Portfolio Yields 29 Portfolio Quality 29 Client Drop-Out 31 MISFA: The Whole Sale Lending Apex 31 On-going Donor Funded Initiatives in Support of the Microfinance Sector 32 Chapter 5: Demand for Microfinance Services 35 Chapter 6: Impact 38 Overview 38 Impact on Women 39 Impact on Poverty 40 Chapter 7: Regulatory Frameworks 41 4 State of Microfinance in Afghanistan

5 Chapter 8: Challenges Facing the Sector 43 Overview 43 Weak Management and Implementation Capacity 43 Portfolio at Risk 43 Sustainability 44 Limited Source of Financing 44 Ability to Attract Foreign Financing 45 Narrow Product Range 45 Re-examination of Delivery Strategies 45 Outreach to Rural Areas 46 Impact on Poverty 46 Impact on Gender 46 Strengthen Capacity of Support Organizations 46 AFS (Ariana Financial Services (Mercy Corps) 80 AMFI (Afghanistan Microfinance Institution) (CHF International) 82 ARMP (Afghanistan Rural Microcredit Programme (Aga Khan Development Network)) 84 BRAC - AFG (BRAC Afghanistan) 86 CFA (Child Fund Afghanistan (CCF)) 88 FINCA AFG (FINCA Afghanistan) 90 MADRAC (Microfinance Agency for the Development and Rehabilitation of Afghan Communities) 94 MoFAD (Micro Finance Agency for Development (CARE)) 96 OXUS AFG (OXUS Afghanistan) 98 Parwaz (Parwaz MicroFinance Institution) 100 Sunduq (Khadamati Mahally Sunduq) 102 WOCCU - AFG (WOCCU Afghanistan) 104 WWI - AFG (Women for Women Afghanistan) 106 Institute of Microfinance (InM) 5

6 Chapter 1: Introduction and Objectives Overview The Institute of Microfinance (InM) has undertaken the task of publishing reports on the state of microfinance in different regions. Each year, InM will prepare a document on the state of micro finance in different regions. In 2009, the Institute will publish a report on the State of Microfinance in the SAARC countries. This series will include seven country reports on each of the SAARC countries. This report on the state of the Microfinance Sector in Afghanistan is part of this first series of reports. This report will attempt to provide an overview of the state of micro finance in Afghanistan from both the demand and supply side up to the end of December The report is based on secondary information and much of the information reproduced here has been provided by the MicroFinance Investment Support Facility for Afghanistan (MISFA), the MIX Market, independent researchers, reports produced by the MFIs themselves and the donor agencies supporting the sector in Afghanistan. The report includes an analysis of the impact on the sector based on published information and review of case studies. Interviews were held with some of the representatives of selected MFIs and MISFA for a more in-depth discussion of some of the key issues. 1 Country Background Afghanistan is one of the poorest landlocked countries in the world affected by a conflict that has lasted for more than 20 years. Estimates of current population vary between 24 million 2 and 30 million. 3 Afghanistan is a rural economy with about 77% of the population living in rural areas. Agriculture has been traditionally the major activity for a large proportion of the population but the sector has suffered from 25 years of conflict, destruction of its infrastructure, low investments and natural disasters. Afghanistan has among the lowest kilometres of road per square km and only 16% of the roads are paved. About half of the rural population lives in areas inaccessible for part of the year. There is a lack of adequate levels of health and education services. The authority of the Government and its capacity for governance are very limited outside the capital Kabul. Although the Central Government appoints Local Governors, its influence and law enforcement is very restricted. Many areas of the country are still under the control of Taliban militant groups and warlords, thus out of reach of assistance. Lack of security in the country has severely limited economic growth and development. However, since the overthrow of the Taliban, there has been an improvement in economic prospects partly as a result of the influx of development assistance. According to the IMF the Afghan economy has grown at a rate of 11.4% per year in real terms since The IMF projected that the real growth was likely to increase to 13% in This strong growth can be attributed to the reconstruction efforts fuelled by development assistance 1 MISFA, BRAC, MOFAD, WWI, Ariana, FINCA, etc. 2 Afghan Central Statistical Office, World Bank, WDI State of Microfinance in Afghanistan

7 and the recovery of the agriculture sector. From 2001/02 to 2005/06, per capita income increased 2.5 fold from US$123 to US$300. Agricultural production is the main source of rural livelihoods and despite a severe drought from 1998 to 2004, agriculture has been the main driver of economic growth. The contribution of the sector to GDP has steadily increased from 36 percent in 2005 to 53 percent in Livestock activities are an integral part of most farming systems in Afghanistan. Previously, the livestock subsector accounted for 40% of total export earnings. About 50 percent of the livestock herd was lost between 1997 and Nowadays it is estimated that livestock numbers have decreased to about half the level of a decade ago due to the prolonged drought, declining feed, overgrazing of rangelands and poor animal health. The smallest and poorest farmers, who formerly kept at least one cow to provide for their subsistence, do not own any animals. Disease problems are being only partially contained. Rangeland is overgrazed; nomadic and semi sedentary shepherds are experiencing high livestock mortality rates. Many herding communities like the Kuchi are in danger of losing their transhumance lifestyle because the prolonged drought has led to a virtual depletion of their livestock. Improvements in the small ruminant sector, even in normal times are hampered by traditional user rights and grazing practices. The small poultry flocks - almost exclusively owned and managed by women - have diminished in many households. Fears about bird flu have contributed to a further reduction of poultry. Unaccounted by official statistics, Afghanistan is presently one of the largest opium producers of the world. UNODC estimated that 47% of Afghanistan's GDP came from growing poppy and illicit drugs in the period 2004/2005. The I-ANDS states that opium is central to household and national income and 40%-50% of the GDP derives from it. UNODC 5 reports that the total area under opium poppy cultivation in 2006 increased by 56% compared to 2005 and is expected to increase further. 6 About 200,000 households are involved in poppy cultivation whereas an additional 15,000 people participate in drug processing and trafficking. Many more tend to benefit from indirect effects such as employment in construction and trade financed by drug profits. Opium cultivation has become a major strategy for coping with the growing burden of rural debt and landlessness, as well as with food shortages. Given the lack of water and water management, opium is also economically attractive because it is more drought resistant than other crops. Poverty measurement in Afghanistan is severely constrained by lack of data. It is difficult to reliably estimate income or asset poverty. Periodic estimates of food security have been used as a proxy for poverty headcount ratio since food insecure households tend to be poor. The National Vulnerability and Risk Assessment (NVRA) 2003 estimates that 3.5 million people are extremely poor and 10.5 million are moderately poor. The I-ANDS indicates that over 21% of the rural population lives in extreme poverty and faces food insecurity. A total of 38% rural households (about 6 million of Afghans) face chronic or transient shortage of food. Poverty in Afghanistan appears to be a multi-faceted phenomenon, involving low assets (physical, financial and human), a long period of conflict insecurity and drought, poor infrastructure and public services. The Human Development Index (HDI) 4 Islamic Republic of Afghanistan, National Development Strategy ( ), UNODC (2007), Afghanistan Opium Winter Rapid Assessment Survey, February UNODC (2006), Afghanistan Annual Opium Survey Report and UNODC (2007), Winter Rapid Assessment Survey, February 2007 Institute of Microfinance (InM) 7

8 value (0.346) ranks Afghanistan 173 out of 178 countries worldwide 7. Over 80% of the population is illiterate. Life expectancy at birth is under 45 years. However, despite extensive damage to the production system caused by the war and fluctuations in the annual rainfall, Afghans have been resourceful at maintaining a minimum level of calorie intake by relying on social networks, migration, and cultivation of drought-resistant cash crops (opium poppy) as a livelihood option. 7 Afghanistan is ranked close to the bottom of the HDI index, followed by five African countries: Burkina Faso, Burundi, Mali, Niger and Sierra Leone. 8 State of Microfinance in Afghanistan

9 Chapter 2: History of Microfinance Overview The history of banking in Afghanistan bears the marks of decades of war which had led to the collapse of the formal banking system in Afghanistan. Microfinance services in Afghanistan are currently provided by three sources (i) formal institutions, such as banks (ii) semiformal institutions, such as non-governmental organizations (NGOs) and (iii) informal sources such as moneylenders and shopkeepers. The six state owned banks which had been operating in Afghanistan prior to the war had stopped their operations though they still exist legally and have some assets. Before the end of the war, the banking sector in Afghanistan was merely operational and formal economic activity in the country was minimal. Without functioning commercial banks, the country depended on the traditional Hawala system for money transfer which was the only effective payment system in place, and the informal credit market which met the demand for liquidity. With the fall of the Taliban regime in late 2001, and the creation of a democratically elected Government, key changes were made to reinvigorate the banking sector. The Government introduced new financial sector legislation in 2002 for strengthening Da Afghanistan Bank (DAB) for monetary control and banking supervision and in establishing a commercial banking sector. At Present there are 15 licensed banks in the country including three state owned banks, seven private sector banks and five foreign banks. 8 While Da Afghanistan Bank still offers some commercial banking functions, these activities are being phased out as the commercial banking sector adds capacity. The Banking sector has gradually been offering the full spectrum of services. The Banking sector has also created an apex body called the Afghanistan Banking Association in 2004 to represent member banks for the protection of its interest and lobbying for it in dialogues with the DAB. In addition, there is one leasing company and two insurance companies which have recently started operations in Afghanistan. However the provision of financial services by the formal sector is limited to urban areas and the informal sector, most notably the Hawala dealers still meet most of the transfer and remittance service needs in the country. The Informal Economy The World Bank estimates that between 80% and 90% of the economic activity in Afghanistan occurs in the informal sector, and almost all credit and other financial transactions are still carried out in the informal sector. 9 Four kinds of agricultural credit arrangements for small and poor farmers are prevalent in Afghanistan. Anawat involves short selling of commodities for cash loans, a system that is sometimes used by shopkeepers. Commodity credit is the delayed payment for commodities purchased from shopkeepers and traders. The third and most common form of credit is from family and kinship group sources. The fourth system is called salaam and is the credit system most widely used by opium traders. It involves the advance sale of produce at negotiated prices, often before planting season but also later on in the crop cycle. 8 Hussein, Maliha H. Review of the MicroFinance Sector in Afghanistan for the Appraisal of the Rural Microfinance and Livelihoods Support Programme. International Fund for Agriculture Development. November Rasmussen, Steve. The Current Situation of Rural Finance in Afghanistan. The World Bank Institute of Microfinance (InM) 9

10 The largest informal sector financial service provision system in Afghanistan is the hawala system, and while it is not a major provider of agriculture credit to small farmers, the hawala system provides money services that play an important role in the economic life of the country and in the opium economy, more so in the absence of a developed formal sector. Da Afghanistan Bank has introduced legislation to supervise the hawala system and other providers of money services, though supervision will need to take a pragmatic approach, accounting for the importance of the informal sector and the significant amount of time it will take for the formal sector to make access available to most people. The Growth of the Formal Micro-Finance Sector At the end of 2001, Afghanistan s formal financial system was virtually non-operational, with insolvent public financial institutions, and no private banks. Hence, dependency on informal sources of finance (such as family and friends, moneylenders and shopkeepers, traders, and landlords) increased. Microfinance programs had limited outreach (approximately 10,000 clients at the end of 2001) and weak institutional structures. Savings services were limited to a few informal schemes and in-kind saving such as opium in poppy-growing areas. In 2002, there were estimated to be about 500 NGOs working in Afghanistan of which 20 to 25 were providing some kind of credit services, though half of those had tiny programs that were not designed to be sustainable. 10 These achieved limited outreach and low sustainability due to a handout approach, hyperinflation and interest rate caps imposed for religious reasons. The World Bank and prominent members of the new Afghan government joined forces to establish a single mechanism for channeling what was hoped would be major investments in a new, rapid-growth microfinance industry. The Microfinance Investment Support Facility for Afghanistan (MISFA) was established as an apex institution in 2003 and was funded via the World Bank's Afghanistan Reconstruction Trust Fund (ARTF). CGAP was brought on board to provide microfinance technical expertise. This mechanism has helped to coordinate donor financing, encourage international and local NGOs to enter the microfinance sector and to help meet the growing demand in the sector. MISFA was recently transformed from an entity within a government program to an Afghan company with limited liability. Now, it is a non share holding company owned by the Ministry of Finance (MoF) and governed by an independent Board of Directors. This provides MISFA with more autonomy to attract new donors and to retain the involvement of those that continue to provide funding directly to government in order to continue to stimulate the expansion of the microfinance sector in the country. The objectives for which MISFA was created included the following; (i) co-ordinate donor funding so that the conflicting donor priorities endemic in post-conflict situations do not end up duplicating donor efforts and distorting markets; (ii) help young microfinance institutions scale up rapidly by offering performance-based funding for operations and technical assistance; and (iii) build systems for transparent reporting and instill a culture of accountability. In short, MISFA was expected to fast track MF development by making the best use of 10 Rasmussen, Steve. The Current Situation of Rural Finance in Afghanistan. The World Bank State of Microfinance in Afghanistan

11 limited public funds over a limited period of time to invest in institutions that would become sustainable, grow further without requiring more subsidies, and help make a transition from international organizations with microfinance expertise to Afghan organizations with local staff. While most donor agencies providing financing to the sector channel their funds through MISFA, there are some like the USAID and a few other donors who are providing direct funding to some MFIs. However, the volume of direct financing to MFIs is small and most of the donor agencies prefer to go through the Apex. MISFA is currently the main source of financing for the micro-finance sector. The number of MFIs supported by MISFA has grown from only 3 in 2003 to 15 at the end of December MISFA s partners include 13 NGOs, one credit union and a micro-finance bank. While most microfinance institutions were originally set up by experienced international NGOs, they are in the process of becoming companies under Afghan law. The Models of Micro-Finance in Afghanistan The models of micro-finance being used in Afghanistan have all been imported from experiences gleaned elsewhere. There are few models which have developed indigenously in the country. The predominant models combine the group lending approach with individual lending. Some also use the solidarity group lending Figure 1: Types of Delivery Methodologies model. While one or two organizations have experimented with Self Help Group models these have not really taken off in Afghanistan. The membership approach is being used in the establishment of member owned credit unions. However, this membership model is being used in a limited manner and it is too early to say if this model will work in Afghanistan and be taken to any significant scale. Most MFIs are attempting to use the group methodology and within that the solidarity group such as BRAC or village organizations such as the Afghanistan Rural Micro- Credit Programme (ARMP). An innovative seed bank idea was also tried by the International Center for Agricultural Research in the Dry Areas (ICARDA) in Afghanistan. Figure 1 below outlines the different delivery methods being used in Afghanistan and this illustrates that the full spectrum of arrangements is being tried in the country. Institute of Microfinance (InM) 11

12 Individual lending is defined as the provision of credit to individuals who are not members of a group that is jointly responsible for loan repayment. 11 This methodology is used by at least 8 MFIs in Afghanistan, as well as by all banks. It requires frequent and close contact with individual clients in order to provide products tailored to the specific needs and cash-flow of the business; therefore the loan officer to client ratio is much lower than it is for group lending. In Afghanistan, individual loan sizes range from $120 - $6000, depending on the need of the client and the experience of the MFI in lending to that type of client. An analysis of cash flow and simple debt to income ratios are often used to determine the clients ability to repay. Normally a client begins taking out smaller loans and as the clients build their credit history, asset base, and relationship with the lending institution they increase their access to larger loans. The issue of collateral affects this type of loan most. The poor legal infrastructure and problems of land titling have restricted the ability of lending institutions to provide loans in large amounts. A trust relationship and strong repayment record are the primary guarantees for individual lending until mechanisms for contract enforcement and improved land title records are available in Afghanistan. The need for frequent and close contact with clients is one of the major challenges for financial institutions trying to reach rural clients; both weak infrastructure and increased administration costs add to the cost of individual lending programs for farmers, wholesalers, rural traders, and others in rural areas. This is the type of credit, which is considered the most desirable by borrowers, and is most requested. The security of the area and the availability of transport directly impacts access issues. One of the earliest approaches used in Afghanistan for the delivery of credit, although a few still practice this approach is that of combining it with an integrated development programs and use a combination of technical assistance, agriculture inputs, credit mechanisms, and community development activities to assist a specific population, usually to respond to a specific social need such as food security, agricultural development, or women s empowerment. The credit products generally develop out of a perceived need not for credit specifically but as one piece of a development program. This makes them weak in some aspects but useful as examples of interventions that may be able to be adapted and used as a response to the needs identified in Alternative Livelihoods analyses. Approximately nine organizations in Afghanistan are currently doing credit or grant finance activities that are designed as a complement to a non-financial activity. These financing activities may or may not follow best practices in lending, and sometimes blur the lines between grant and loan products. Often these programs were created because no MFI existed in the area of operations, or existing MFIs were unable or unwilling to meet the financing needs of the population targeted by the program. The financing structures that are established as a result are generally not sustainable. This model has the advantage of ensuring that technical assistance and marketing needs of the borrower are met -- making it more likely that borrowers will be able to enter new markets and create successful businesses. However, it is the least sustainable, as these activities have a high-cost that cannot normally be covered by the fees and interest collected by an MFI. In many cases, no fee is being charged for any services (credit provision, technical assistance, marketing) meaning that the activity will only function as long as donors or the government supports it. 11[11] Sustainable Banking with the Poor: Microfinance Handbook -- An Institutional and Financial Perspective, Joanna Ledgerwood, World Bank, State of Microfinance in Afghanistan

13 Group lending methodology is being used by financial institutions in Afghanistan fairly frequently. Group lending approaches involve the formation of a group with a fairly homogeneous need for credit in terms of loan size and term, although the loan uses within a group are normally varied to decrease the risk of default for the group overall. In Afghanistan, group sizes vary from 4-20 members, who act as a guarantor for the loans of all members of the group. In case any member of the group cannot make a repayment, the other members of the group must repay on that person s behalf. Loans under this methodology tend to start small and have short repayment periods. The range in Afghanistan runs from $85-$600, increasing with each loan cycle. Groups with a good repayment history can continue taking loans of increasing size and duration; and several programs in Afghanistan allow borrowers to graduate from group lending to individual lending after a certain number of cycles. One of the greatest advantages of this loan product is that peer pressure acts as the loan collateral. When one member is unable to repay, further lending to all members is normally stopped. Therefore, moral hazard is decreased by group members that are risk-averse and those who want to protect their individual borrowing capacity. Group lending also can help decrease administrative costs, as several loans are managed by the group leader. The greatest advantage of using this type of loan to respond to the credit needs of poppy cultivators is that MFIs using this methodology have, in a very short period, been able to set up operations in a large number of districts and provinces. However, the small size of the loan, especially in the initial stages, limits the investment and income creation opportunities. There are four organizations implementing programs that utilize the Village Banking methodology. Village Banks are community-managed savings and loan associations established to provide access to financial services in rural areas. Membership usually ranges from members and the bank is financed by mobilization of members savings in addition to seed capital, which all members agree to be liable for. 12 A Village Bank has a management committee that determines the loan procedures, amounts, and terms. Member s savings are usually tied to loan amounts and savings are used to finance new loans or collective income-generating activities. The key distinction of this lending product is that a community group determines who receives loans, under what conditions the loans are provided, and for what purpose the loans can be used. This model has been limited by the amount that can be mobilized in a community, and may not be useful in areas that have a limited ability to save due to high debts or low asset base. Concerns about levying interest as un-islamic have further limited the expansion of this model in Afghanistan. WOCCU 13 is the apex organization of the international credit union system which is assisting with the setup of credit unions here in Afghanistan. Unlike banks and micro finance institutions, credit unions are formed and owned by their members. Only owner-members have access to the savings and loan services provided by each credit union. Awards for Savings are 8% per annum. The loans have a service charge of 2% per month. WOCCU has received USD 19.4 mn and USD 8.3 mn funding from USAID and MISFA respectively to expand its presence 12[ Microfinance Handbook: An Institutional and Financial Perspective, Joanna Ledgerwood, World Bank, WOCCU is the world s largest development agency for Credit Unions. It has credit union members in 92 countries with 42,705 credit unions affiliated to it. Together, they hold savings of USD 764bn and have a loan portfolio of USD 612bn. The total credit union membership is of 157 million and together they hold assets USD 894 bn and reserves worth USD 91bn. Institute of Microfinance (InM) 13

14 in Afghanistan. The USAID funding will be used to set up 20 credit unions and points of service, designated as Investment and Finance Cooperatives (IFCs) in Northern, Southern and Eastern Afghanistan. This funding is part of USAID s USD 80 mn support to the Academy for Educational Development s (AED) Agricultural, Rural Investment and Enterprise Strengthening Program (ARIES). This ARIES program aims to convert back into productive cultivation those farmers who have lapsed into opium cultivation in this conflict-ravaged region. WOCCU, which is associated with AED, will receive USD 15.4 mn as a grant and the remaining USD 4 mn will be in the form of a convertible subordinated debt to equity investment in the project IFCs. The Investment and Finance Cooperatives being set up in Afghanistan are expected to run as per Islamic Banking Principles. The Aga Khan Foundation (AKF) and the Natural Resources Institution (NRI) supported by the Research in Alternative Livelihoods Fund (RALF) programme have on a pilot basis established Self Help Groups (SHG) as an alternative approach to microfinance provision for the poor in Badakhshan province. The project is based on the voluntary formation of community level SHGs in villages. The experience of this program shows that the loans provided through the Self Helping Groups can, at least in part, replace informal and formal credit sources that have high service charges. Affordable credit through the SHGs can lead to viable opportunities to start or expand income-generation activities that reduce dependency on poppy and improve the livelihoods of rural Afghan families. There was ample demonstration that the SHGs themselves own and understand the process and make all the key decisions about the management of the Groups and their finances themselves. The regular monthly meetings contribute to social cohesion, and provide a forum for discussion of positive developmental opportunities. Of particular importance in this model was the report that this model helped in the empowerment of women through the formation of women s SHGs. The SHG model is less threatening to religious and vested financial interests than other forms of finance. However, this model has not been taken to scale. In Afghanistan a few organizations have tried the concept of Seed Banks which is a credit mechanism that allows farmers to borrow seed and fertilizer before planting, and repay the value of these items either in cash, wheat seed, or wheat grain after the harvest. This mechanism was initially used to introduce high quality wheat in rural areas in order to increase yield. The Seed Banks are considered successful both by borrowers and program managers, and have created the conditions for Village Banks to be developed out of the community mechanisms used to manage the Seed Bank activities. The methodology is that a shura or specially created village organization is given (as a grant) a predetermined amount of wheat seed and fertilizer. This amount normally represents 25-75% of the seed requirements of the community. The shura determines on what terms and which families will receive the loan of seed and fertilizer. Some programs require only the seed to be repaid; others require the total value of the package to be repaid. Some ask for voluntary additional contributions after harvest, others have no additional cost for the borrower, or require only partial repayment (50%). In some of the very successful seed banks, shuras have chosen to liquidate excess seed in the bank in order to purchase community assets such as a tractor. This type of credit is also sharia-compliant, making it attractive in conservative areas. Strategies of Leading MFIs Today BRAC Afghanistan is the largest in terms of its client outreach, geographic coverage and staff strength. BRAC began its operations in Afghanistan in response to the conflict in Afghanistan and the flood of returning refugees in It is implementing a holistic strategy developed in Bangladesh which has been adapted to suit 14 State of Microfinance in Afghanistan

15 the local context. BRAC has established a small training centre through which it trains its rapidly growing staff. Currently 95% of the 1,985 BRAC Afghanistan staff in the microfinance sector is Afghani and 1,104 are women. The NGO has also recently established a separate BRAC Afghanistan Bank (BAB) which is a commercial Bank with its headquarters in Kabul. The First Micro Finance Bank in Afghanistan is the largest MISFA partner in terms of the volume of funds disbursed. It was established by the Aga Khan Agency for MicroFinance. (AKAM). The Bank provides credit and saving products as well as domestic and international payment services. It focuses on micro-enterprises and small businesses. Beginning in Kabul and urban centres in the northeast of the country, the Bank will gradually expand to urban and rural areas of Afghanistan, with a view to opening 14 branches in the next three years. The Aga Khan Development Network (AKDN) has also been implementing credit programmes through the Afghanistan Rural Micro-Credit Programme (ARMP), which provides a wide range of credit products to farmers and traders in rural provinces. Loans have allowed some farmers to repurchase land sold during civil strife to poppy farming landlords and warlords, replant the fields with wheat and potatoes and acquire livestock. There are plans to merge the operations of the ARMP into those of the FMBA. Given their very disadvantaged position and status, MFIs in Afghanistan give preference to women clients. Female headed households have the highest incidence of poverty 14 of all vulnerable populations they are more likely to be landless, do not have access to irrigated land, and have limited access to productive assets such as livestock. Female-headed households also have restricted access outside their compound and have limited formal entitlements to productive assets. The Afghanistan Rural Microcredit Programme (ARMP), Bangladesh Rural Advancement Committee (BRAC), Micro Finance Agency for Development (MoFAD), Parwaz and Women for Women (WFW), work exclusively with women clients in the field of small loans. Parwaz uses a cost-effective strategy to reach female clients by hiring part-time community agents, known as Promoters, who live in the community and have strong client relations. They host weekly group meetings and ensure high repayment and social networking. Each loan officer works with 2 community promoters and is able to reach as many as 600 clients. MADERA a French non-profit organization, working in Afghanistan for more than 16 years has also been implementing a micro-finance programme. It has tried to target farmers, during the last 10 years, in four provinces of Eastern Afghanistan. Some of its specific aims in the sector are to support rural economic development through access to credit, ensure the inclusion of the poorest in the system and to strengthen the capacity of communities to control their local development, through a community based management of the MFI and through integration of the micro finance activities in other developmental activities. 14 National Risk and Vulnerability Assessments Institute of Microfinance (InM) 15

16 Most partner MFIs provide microfinance services exclusively. In accordance with best practice, NGOs that traditionally integrated their financial and social services have started to distinguish between the two with MISFA support - in order to create independent and sustainable microfinance institutions. Only a few institutions have developed linkages between financial and non-financial services as a way to extend their social reach and impact. These institutions, such as Women for Women, FINCA and BRAC, which channels technical assistance on livestock to select clients, rely on alternate funding to integrate these programs. Women for Women target vulnerable women usually with no former business experience and limited productive assets to receive small grants, entrepreneurship training, business support and health education. Many of these women graduate into the institution s formal microfinance program. FINCA Afghanistan began its operations in Herat in 2004 and has now expanded to other parts of the country. The program focuses outreach on women, ethnic minorities, and returning refugees. FINCA Afghanistan is partnering with the International Rescue Committee (IRC) to link financial and nonfinancial services, enabling very poor Afghan households to overcome constraints to sustainable livelihoods. FINCA will offer financial services to new Afghan clients who will receive market-oriented skills training and business development support from IRC. In order to conform with Islamic principles, FINCA Afghanistan offers three core products: two solidarity group lending programs, the Women's Murabaha Group and the Market Murabaha Group, and a collateralized individual lending program, the Business Murabaha Agreement. Types of Products and Services There are only two services provided by the MFIs in Afghanistan; credit and savings. Within credit the type of product is fairly standard and is a one year or a seasonal loan which is repayable in regular instalments or in two block payments at the end of the harvest season. ARMP and OXUS are providing agricultural credit. The main loan product offered by the largest MFI BRAC is based on a solidarity group methodology with groups of four or five clients, primarily women, each one initially borrowing $ to be repaid in installments over a typical loan cycle of 4 to 12 months. Most MFIs allow good clients to graduate rapidly through subsequent loan cycles with increasing loan sizes. Some MFIs have also introduced another loan product that is for individually owned enterprises, primarily managed by men, with loan sizes between $250 and $2000 to be repaid in installments over a year or more. One or two MFIs such as FINCA have recently introduced non-interest bearing Murabaha Islamic loans or contracts where sellers declare their cost and profit. Only 1/3rd of the MFIs provide a voluntary savings product most require mandatory savings which is in this analysis not treated as a product but as a fee for access to credit services. 16 State of Microfinance in Afghanistan

17 BRAC Afghanistan The implementation of its programmes is facilitated by Village Organizations (VOs) and based on local community participation. Each VO has between 25 and 40 women members and hosts weekly meetings. Following consultations with village Shuras, BRAC staff approaches every household to join their VOs and enroll in the microfinance activities. BRAC s major microfinance product is a small loan programme with a loan size of between AFS 8,000 and 20,000 to be repaid in weekly instalments. Savings are compulsory and members receive benefits in the event of an unexpected death. Products Small Enterprise loans AFS 40,000 to 500,000 to be repaid within one year in monthly instalments. BRAC staff works closely with the entrepreneur in developing his business and keeping track of the cash flows. Agriculture and Livestock Development and Credit Support Program (ALDSCP) AFS 15,000 30,000 for Poultry, Livestock to be repaid in 12 equal monthly instalments. Alternative Livelihood Rural Finance Program (ALRFP) USD 15,000 20,000 for Agriculture, Livestock and others to be repaid in 12 equal monthly instalments. BRAC charges a 17.5% flat rate for loan provision services. As the microfinance sector grows, it is expected that it will begin to offer a broader range of financial services, such as savings, insurance, and housing loans, while also using technology such as mobile telephone networks to increase outreach and improve efficiency. Steps are already being taken to widen the range of financial service products in order to meet demand, including Islamic loan products, diversify MFI funding sources to include commercial funding, and expand small business lending by commercial banks and MFIs. In late 2006 MISFA opened an SME financing window for NGOs, thereby closing the middle gap for agricultural loans. Table 1 below outlines the products and services offered by each of the MFIs and their delivery methodology. Table 1: Approach Used by MFIs in Afghanistan MFI Approach Products and Services AFSG (program of Mercy Corps) AMI (program of CHF) ARMP (program of AKF) Solidarity groups of 4-8 Individual lending Group Lending Individual lending Individual Lending Group Lending Village Banking Credit Credit Credit Savings Institute of Microfinance (InM) 17

18 Microfinance Program of BRAC Afghanistan Village Organizations with subgroups such as solidarity groups Credit Mandatory Savings FINCA Afghanistan Group lending Individual lending Credit Islamic Products Group Savings MADRAC (program of DACAAR Group Lending Mandatory savings; Credit; Voluntary Savings MOFAD (program of CARE) Saving & Credit Groups Individual lending Group Savings; Credit OXUS Afghanistan Solidarity group Individual loans Credit (program of ACTED) Collective loans PARWAZ Group Guarantee Loan Individual Loan Mandatory Savings; Credit SUNDUQ (program of MADERA) Individual loans Small Enterprise Loans Collective loans Mandatory Savings Credit Voluntary Savings WOCCU Community Credit Unions Credit Savings Microfinance Program of WWI Group lending Credit First MicroFinance Bank Individual Loans Savings Limited Savings Source: Nagarajan, Geetha, Henry Knight and Taara Chandani and MFIs. 18 State of Microfinance in Afghanistan

19 Chapter 3: Growth and Outreach Client Outreach A review of the growth in the microfinance sector in Afghanistan reveals that there has been very steep growth in the number of clients and portfolio outstanding in the last three years. The rapid growth has been led mainly by two MFIs, BRAC and the First MicroFinance Bank (FMFB). While a few MFIs still operate without assistance from MISFA, the main sector players all go through the apex. MISFA client outreach in Afghanistan increased from a mere 12,000 clients serviced by 3 NGO-type MFIs with a portfolio outstanding of less than US$ 1.1 million in 2003 to 441,092 active clients at the end of December MISFA supported MFIs have 350,692 current borrowers with a current portfolio outstanding of over US$ 106 million. The cumulative loans disbursed by the MFIs since the inception of MISFA are US$ 557 million with a savings of US$ 14.6 million. Table 2 below provides the overall figures at a glance. Available data has been plotted and shown in Figure 2 below. The figure shows the steep climb in active clients between 2006 and The rate of growth has come down in the last year. Figure 2: Growth in Active Clients and Borrowers Institute of Microfinance (InM) 19

20 Table 2: MISFA Performance up to December 2008 Outreach Provinces Districts Active Clients 192, , , ,092 Active borrowers 160, , , ,692 Client dropout (cumulative) 69, , , ,663 No. of loans disbursed (cumulative) 321, , ,744 1,317,038 Amount of loans disbursed, $ (cumulative ) 71,536, ,409, ,331, ,240,936 No. of loans outstanding 160, , , ,904 Gross Loans outstanding, $ 27,623,763 51,653, ,927, ,373,056 Client Savings outstanding, $ 2,956,353 4,990,573 11,416,667 14,603,226 Coverage The geographic coverage of MFIs is indicated on the map of Afghanistan below. This shows that there is a concentration of service provision in the capital Kabul which has 40% of the clients and 39% of the portfolio. The Northern parts of the country also have 40% of the clients and 45% of the portfolio. However, there is very little coverage in the west and southern parts of the country. Large parts of the country receive virtually no coverage from the formal microfinance sector. The coverage by the informal sector has not been properly documented and there are no figures available on its outreach and volume. However, a recent study shows that only 5% of the demand among the bankable poor 15 is now serviced by the MFIs in Afghanistan, and only 8% of the estimated credit requirements are met by the MFIs measured by proportion of economically active population below the poverty line. 16 Nagarajan, Geetha, Henry Knight and Taara Chandani. October 18, State of Microfinance in Afghanistan

21 Figure 3: Geographical Coverage of the Formal MicroFinance Sector in Afghanistan Figure 4 below shows the growth in the loan portfolio outstanding. There was rapid growth in the volume of funds between 2006 and However, this curve seems to have flattened out in the last year. Between December 2006 and December 2007, MFIs in Afghanistan doubled clients and almost tripled portfolio outstanding in 12 months. There are now growing concerns 17 about the speed with which the sector has grown and many are skeptical about the claims of outreach made by some of the largest providers The PAR of both FINCA and MADRAC are areas of concern for MISFA.. 18 Local MFI leaders from WWI, MOFAD and Ariana are open in their criticism about BRAC Afghanistan and maintain that BRAC has given multiple loans to the same clients and question their numbers. Institute of Microfinance (InM) 21

22 Figure 4: Growth in Portfolio Like in most countries the sector is dominated by a few MFIs. Between them, BRAC, FMFBA, FINCA and ARMP serve 71% of the clients and have 73% of the portfolio. BRAC currently serves 43% of the total active clients and has 26% of the total volume of portfolio outstanding while the FMFB has 14% of the share of active clients and 33% of the outstanding loan portfolio. As can be seen from the figures below most MFIs have between 3000 and 20,000 active borrowers and only 5 offer savings products as can be seen from the difference in the number of active clients and borrowers. There are no insurance products on offer. FINCA and one or two others are experimenting with leasing but these have very limited outreach. This table covers the main players in the formal microfinance sector who operate through MISFA. A few organizations have received funding from USAID and a few other donors outside the MISFA umbrella. However, these are small in number and do not report to any self-regulating organization within the microfinance sector. Table 3: Total Active Clients and Borrowers by MFI in Afghanistan in 2008 MFI Active Clients Active Borrowers (%) Share of Active Clients (%) Share of Active Borrowers AFS 11,181 11, AMFI 3,896 3, ARMP 21,905 21, BRAC 188, , CFA 20,145 20, FINCA 38,499 38, MADRAC 18,148 16, MOFAD 15,156 11, OXUS 14,394 14, PARWAZ 12,180 12, State of Microfinance in Afghanistan

23 SUNDUQ 10,531 10, WOCCU 15,540 4, WWI 9,549 9, FMBA 61,162 36, TOTAL 441, , In loan terms of gross amount, a total of US$ was outstanding at the end of December The First Microfinance Bank has the largest share of the loan amount at 33% of the total followed by BRAC at 26%, ARMP 14% and FINCA 6%. The average loan size in the sector is USD 303 with the range varying form USD 133 to USD 972. Table 4 below gives the total loan outstanding by MFI and also provides details of the average loan size of each MFI. Table 4: Details of Loan Amounts of Afghan MFIs (September 2008). MFI Gross Loan Amount Outstanding (US$) (%) Share of Gross Amount Outstanding Average Loan Amount (US$) AFS 3,521, AMFI 763, ARMP 15,352, BRAC 27,310, CFA 3,366, FINCA 5,330, MADRAC 2,433, MOFAD 2,231, OXUS 3,763, PARWAZ 1,959, SUNDUQ 1,476, WOCCU 2,542, WWI 1,273, FMBA 35,046, TOTAL 106,373, Female Clients Female clients make up a major share of the borrowers. However as can be seen from Table 5 below the proportion of women clients in the sector has decreased somewhat in the last four years from 72% in 2005 to 63% Institute of Microfinance (InM) 23

24 at the end of December The data on the volume of loans extended to women is not available but MISFA estimates that this would be around 50%. 19 A major issue which has not been addressed in the sector in Afghanistan is regarding who is actually using the loans extended to women. There has been no serious attempt to investigate this issue. Like in Pakistan it is suspected that a large proportion of these loans are actually being used by the male members of the household. Table 5: Growth in Female Clients Outreach - Vulnerable Section Women Clients 139, , , ,719 Widow clients - 4,177 3,370 2,191 Disabled clients Returnee clients 3,114 11,316 13,174 13,872 Women as % of Total Clients 72% 74% 66% 63% Savings Savings is the forgotten half of microfinance in South Asia as a whole and in Afghanistan in particular. Only 60% of the sector institutions are involved with savings. However 40% of the organizations which collect savings require it as part of their lending methodology and require mandatory savings as collateral. Others only offer a group savings product which limits its potential attractiveness for clients because it destroys some of the most valued features of savings such as confidentiality, liquidity and convenience. Among the organizations which offer a savings product which is voluntary are the First MicroFinance Bank which does not cater to the poor or rural clients in any significant manner and WOCCU which has a small volume of the overall savings. The FMFB (53%) and BRAC (38) between them have 91% of the total savings of US$ 14 million. While the BRAC savings product is valued by some of its 155,000 members it is designed more to fulfill the purpose of collateral and social capital formation as opposed to a product which is highly valued by the client. The attitude of BRAC Afghanistan to savings is illustrated by the fact that savings is not even mentioned on its web site as a financial product when all other products are explained in great detail. 19 Discussion with Dale Lampe at MISFA. 24 State of Microfinance in Afghanistan

25 Figure 5: Savings Trends in Afghanistan Apart from the FMFB none of the organizations in Afghanistan have a license to accept voluntary savings. In July 2006 Da Afghanistan Bank announced a new article under which it would license, regulate and supervise Depository Microfinance Institutions. It also announced that Microfinance institutions that accept only mandatory deposits from members are not considered to be DMFIs but they can voluntarily submit to the regulation. However, no one has chosen to register under this regulation as it is not clear what benefit this would provide them given that the regulation allows them to accept mandatory savings from members. Institute of Microfinance (InM) 25

26 Chapter 4: Sustainability Operational Self-Sufficiency The overall operational self-sufficiency of the leading MFIs in Afghanistan was reported to be 80% at the end of December Currently, only two MFIs in Afghanistan, the Children s Fund for Afghanistan and the First MicroFinance Bank of Afghanistan report an operational self-sufficiency ratio of more than 100%. Figure 6 below gives the OSS for the main MFIs in the country. It is generally thought that it takes about 3 to 5 years for MFIs on an average, to attain operational sustainability in conflict affected countries. The operating costs are very high in Afghanistan due to expenses incurred on security measures, small sized loans, low population density, poor infrastructure, the high costs of some services and hiring of expatriate staff. It is possible that the continued insecurity in many areas where some MFIs have expanded to achieve scale is beginning to affect their ability to attain sustainability. Evidence from many countries now shows that rapid growth temporarily depresses profitability. Figure 6: Operational Self-Sufficiency in Afghanistan It is also becoming increasingly clear that the projected growth estimates by MISFA and its partners were overly optimistic. Many MFIs are observed to struggle to meet their projected outreach in their initial business plans. The MFIs are now scaling down their expectations. Funding constraints experienced in 2005 were reported to limit expansion. However, many MFIs were unable to scale up to match the projections even after funds were released by MISFA. It now appears that continued insecurity in many geographic areas, and low human and physical infrastructure capacity, limit expansion more than just funding constraints. The over estimation by the MFIs of their outreach potential, due in part, led to high initial funding commitments from MISFA. Figure 7 below gives MISFA s estimates of its growth until December It estimates that it will be able to reach 20 Monthly Progress Report. MISFA. December State of Microfinance in Afghanistan

27 676,000 clients of which roughly 65% will be women. In terms of the funds it will have an outstanding loan portfolio of US$ 220 million or double its current volume. MISFA also estimates that it will have provided some access to 28 of the 34 provinces in the country. The apex projects that 87% of the outstanding loans will be disbursed by MFIs with an OSS of greater than 100% and that 100 of (possibly 100% and not 100 as a number) the MFIs will have been registered as separate legal entities under Afghan law. The actual outreach of MISFA at the end of December 2008 shows that it is somewhat behind in terms of its targets. Figure 7: Projected Growth of MISFA s MFI Partners The growth in MISFA s portfolio and that of its partners shows a marked change this year. The growth pattern in borrowers shows that against an increase of over 62,000 borrowers (or 21.6%) between March 2007 and September 2007, there has been a decline of over 4,600 borrowers (or -1.2%) between March 2008 and September 2008 and a further decline of 15,000 or (-4%) at the end of December The decline is driven mainly by stagnation in growth of major MFIs and a reduction in the number of borrowers of most MFIs. Figure 8: Change in Active Borrowers of MISFA Source: MISFA December 2008 Institute of Microfinance (InM) 27

28 Productivity of the Sector An analysis of the productivity of the sector indicates that the loan outstanding per branch has steadily risen and each branch on average was handling an outstanding loan portfolio of US$ 375,877 and each staff member had almost doubled her productivity in the last four years and was managing a portfolio of US$ 22,200 at the end of December However active borrowers per staff member had remained more or less stagnant in the 70 to 80 range in the last four years and had even showed a decline between 2007 and This indicates that the loan size is actually increasing. Data on loan per borrower shows loan size has increased by almost 80% in the last four years. Figure 9: Productivity of the Sector Productivity Indicators Loan Outstanding Per Branch 175, , , ,877 Loan outstanding per borrower, $ Portfolio per staff, $ 12,094 16,952 23,457 22,201 Active borrowers per staff Cost per active client, $ 9 10 Interest Rate Policy Generally interest rates on loan products offered by MFIs depending on terms and type of product/guarantee or lack thereof range from 1.4 to 2% flat per month or 17% to 24% flat per annum. There has been some downward pressure on pricing, particularly in Kabul due to competition among the MFIs. There is generally a pressure on MFIs in Afghanistan not to charge high interest rates by the Government of Afghanistan. Interest rates have remained more or less steady given that MFIs in Afghanistan were given clear targets regarding sustainability and most of them expected that they would become sustainable within the first five years. The interest that will be made to clients for their deposits is not a matter which is given any significant prominence in Afghanistan. BRAC does not even mention savings as a financial product in its list of products or what rate it offers on the deposits of its members. The FMFB does not offer any interest on its current accounts. It is difficult to gauge exactly what influences interest rate policy on loan products of the different MFIs in Afghanistan. While some MFIs determine the interest cost on an assessment of the delivery and financial costs that they incur others have determined interest rates based on the capacity of their clients to pay, others affix these based on their own management s understanding of what an MFI should charge given that it is attempting to help poor households in Afghanistan while many have imported programmes from other countries and simply charge sector averages. In justifying their interest costs, some of the MFIs in Afghanistan maintain that the interest rates and charges reflect the costs of doing business in an environment of high security risk, scattered population, high wage and food inflation and of adopting an Islamic approach which entails higher costs due to the fact that female 28 State of Microfinance in Afghanistan

29 loan officers require Maharams and the Murabaha transactions have higher administrative costs, etc. A key factor which has influenced the interest rate policy of MFIs in Afghanistan is the availability of grants for operational costs and subsidised loan funding from MISFA. The apex has helped to keep interest costs down. The MISFA operational manual does not prescribe any specific interest rate policy form for the MFIs apart from a general statement regarding sustainability. In fact a comment about MFIs interest charges appears only in Appendix 37 (aa) and it is not clear what it says as it is never attached to the main Operational Manual Portfolio Yields The average portfolio yield in Afghanistan is 27% but ranges between 4% (Sunduq) to 38% (WWI). The interest rates charged in Afghanistan are comparable with many peer countries. The Government and donors have followed a laissez-faire policy to let the microfinance sector set the interest rates to cover some of their costs for lending operations. However, there are always concerns voiced by the Government about the interest rates charged. Like in most other countries, there has been little focus in Afghanistan on assessing the returns from the investments made by beneficiaries. Many MFIs stated that the availability of grants for covering most of their operating costs is reflected in the rates charged for the services. Portfolio Quality A major area of concern in the microfinance sector in Afghanistan is the portfolio quality of the sector which has deteriorated quite significantly in the last nine months, with the PAR (>30 days) increased from 1.9% in March 2007 to 10.2% in March 2008 and to 9.4% at the end of September 2008 and 10.5% at the end of December 2008, the steepest increase in the last 18 month period. The total amount of portfolio at risk in the sector has reached a total of about $11 million. Of this, over $8 million (or 3/4th) is accounted for by the four big MFIs - ARMP ($2.7 mill.), BRAC ($2 mill.), FINCA ($2.2 mill.) and FMFB ($1.2 million) together, while the rest of the sector makes up the balance. The biggest increase in PAR has been in the case of FINCA and ARMP, by about 18% and 10% respectively. The situation maybe more serious than officially reported as some privately report that their PAR (> 30 days) actually stands at 55% although officially it only reports 36%. In terms of ageing, 1/4th of the total amount at risk is in the day category, another 1/4th is in the day category and rest, nearly a half (49%), is in the >180 days (6 months) category, suggesting that a significant portion of portfolio is at risk of nonrecovery. Institute of Microfinance (InM) 29

30 Figure 10: Portfolio at Risk in Afghanistan Source: MISFA December 2008 Figure 11: MISFA Portfolio at Risk Source: MISFA December The reasons for the increasing delinquency are both external and internal. Among the external factors it is deterioration in the security situation which affects economic activity. Over 50% of the delinquency is due to losses in business, inflation, and migration; while drought conditions prevalent in many parts of Afghanistan, is also affecting the repayment accounting for 20% of the PAR. Weaknesses in internal controls, rapid expansion, limited management and staff capacity were identified as key issues. Fraud, which accounts for 14% of the overall PAR, has been a major reason for the increasing portfolio at risk in MFIs like FINCA and ARMP. As a result improved monitoring and audit of the MFIs have been strengthened and need further augmentation. As a result of the deteriorating PAR, the growth rate at MISFA is not as rapid as it was at one time projected to be by its leadership. 30 State of Microfinance in Afghanistan

31 Client Drop-Out While all MFIs report client drop out, the MFIs in Afghanistan do not have a proper system for tracking drop-outs and all vary on how they track this indicator. MISFA is planning to establish a standard definition and track it properly. MISFA claims that tracing client drop out is a big item on its capacity building. MISFA feels that recent drop outs, in many cases reflect ghost clients, and that the actual borrowers were never as high and the drop outs also aren t as high. MISFA is conducting portfolio audits to assess the extent of ghost clients. At the end of December 2008, the overall cumulative client drop out in Afghanistan was reported to be around 250,000. Available figures indicate that there has been a sharp increase in the total number of client dropouts during the last 9 months. A drop in the client base of FINCA accounts for 49% of the total drop-outs. A majority of the drop-outs have been due to the MFIs stopping disbursements to clients who have not paid previous loans on time. Some of the clients may also be leaving due to a mismatch between their cash flows and the loan repayment conditions. Also, as many MFIs have deliberately slowed down to focus on delinquency, the number of dormant clients may be increasing. Many MFIs have policies in place which stipulate that if a Loan Officer has more than a certain percentage of her/his portfolio in arrears, no disbursements are made to the clients of that particular Loan Officer. MISFA: The Whole Sale Lending Apex The Microfinance Investment Support Facility for Afghanistan was established in 2003 under the Ministry for Rural Reconstruction and Development and later transformed into a private Afghan company. The main objectives of MISFA were (i) to build sustainability and promote microfinance institutions that would not require donor subsidies after 5 years (ii) Expand Outreach of the sector to all 34 provinces of the country with a range of products and services and (iii) develop a sector with Afghan institutions governed and managed by Afghans. MISFA provides investment funds to a wide range of microfinance institutions that, in turn, provide loans to the poor and vulnerable of Afghanistan. MISFA also provides institution-building support to its partner institutions on a declining basis. MISFA has been the single most important institution with respect to microfinance in Afghanistan and has been responsible for the growth of the sector. Grants are available for the MFIs for the purchase of equipment, to provide training to staff and clients, and to cover regular operational deficits (operating expenses less interest income collected from MFI lending operations), up to 100% of an organization s needs. These funds are not for activities that are not identified in an MFI s business plan or that are not part of their regular operations. Grants are provided in the first five years of start-up or expansion of offices for providing services to the poor or vulnerable population of Afghanistan. MISFAs loan funds to MFI s are only for on-lending. These funds cannot be used to fund operational expenses of the MFI or other activities other than the provision of loan capital. Interest rates and repayment term for loans by MISFA to its partner MFIs are determined by the MFI Investment Committee. While considering its own interest rate policy it gives consideration to the competitive situation in the loan market. Institute of Microfinance (InM) 31

32 Indicative Terms of MISFA Loans Term One year, with the option of roll-over to another term after written consent from MISFA management and based on satisfactory performance. Disbursements Based on SOEs up to a maximum amount agreed in the contract. Interest Payments Due quarterly, in arrears. Application Fee None Interest Rate 5% per annum on outstanding principal ( declining balance)interest rate is based on cost of funds, risk premium and MFI profitability and can be modified over time Late fee (penalty) Late fee of 0.5% will be charged on all loans past due Minimum Amount USD 100,000 Maximum Amount Exact amount of loans shall depend on an analysis of the applicant s needs and ability to repay based on the cash flow of its operations On-going Donor Funded Initiatives in Support of the Microfinance Sector The World Bank helped set up MISFA and has been closely involved in its development. Since 2003, the World Bank has coordinated donor assistance to MISFA through the Afghanistan Reconstruction Trust Fund. However donors support MISFA both through the ARTF mechanism and directly as well. The largest supporters of MISFA are the Canadian International Development Agency and DFID. CIDA has contributed about US$ million to MISFA and the United Kingdom has provided close to US$ million. United States has been the largest supporter of assistance outside the ARTF. Denmark, Switzerland, Australia, CGAP, NOVIB, etc also support the apex agency. Oxfam/Novib has supplied limited support for capacity building mainly in the area of general MFI training and mentoring of individual organizations. DFID has provided support to strengthen and expand MISFA core operations and has introduced a special funding window to enable and promote the expansion of microfinance in seven priority poppy-growing provinces. DFID agreed to provide a UK 17 million extension to their general support to MISFA for the next three years. Under the Helmand Agriculture and Rural Development Programme (HARDP) DFID will provide to MISFA around 5.7m over three years (2006 to 2009) to provide loans for income generating activities, such as small shops, small scale manufacturing, handicrafts and agriculture. The World Bank has been providing a small amount of support to MISFA through the ARTF. However, in August 2007, the World Bank approved an additional US$ 30 million IDA grant for Expanding Microfinance Outreach and Improving Sustainability Project for loaning by MISFA to the microfinance service providers. This financing will not use the ARTF mechanism. The World Bank is in the processing of finalizing the design of the 32 State of Microfinance in Afghanistan

33 Afghanistan Rural Enterprise Development Program (AREDP) which is aimed at inclusive economic growth and sustainable enhancement of rural livelihoods. The AREDP design builds on the social capital developed through the National Solidarity Program (NSP) and other projects, by supporting the formation of producer and community groups for savings and income generating activities and fosters forward linkages towards markets and service provision. Achieving the necessary scale in each targeted district through a clustering and graduation approach will improve access to markets and credit. The rural enterprise (SME) component aims to tackle the gaps and disincentives to the private sector active in rural areas and agri-related businesses. This approach integrates a livelihood approach, for social and economic empowerment of the rural poor, with interventions to develop value chains and encourage rural enterprises. However, AREDP will not be providing credit but will provide grants to specialist associations. USAID is providing support through the Agriculture, Rural Investment, and Enterprise Strengthening (ARIES) Project, implemented by the Academy for Educational Development. This is a new project designed to provide economic opportunities and expand access to sustainable rural financial services. ARIES is designed to support equitable access to essential financial services in rural Afghanistan for a range of female and male-owned microenterprises (households and smallholder farmers) and agro-based SMEs. To achieve this goal, ARIES plans to provide technical assistance, training, capital, and operations support for start-up and expansion of retail non-bank financial institutions and capacity building of local commercial banks in rural and SME finance. Through ARIES, the U.S. Government is planning to disburse over 50,000 loans for a total value of $22.4 million; create rural credit cooperatives, 4 investment and finance cooperatives, and 3 new FINCA branches; and establish a new lending window for small and medium enterprise (SME) loans within MISFA. The Asian Development Bank has recently initiated the Rural Business Support Project with the objective of sustainable increase in farm incomes in four rural districts in Afghanistan by linking farmers, agri-processors, and traders into profitable production, processing, and marketing industries through the establishment of four Rural Business Support Centers (RBSCs). The RBSP project will provide $240,000 in technical assistance towards the development of Sharia compliant and agricultural products. Institute of Microfinance (InM) 33

34 Table 6: Donor Funds Pledged/Received Since Inception ( Dec' 08) Pledged Received (USD Mil) Received of Pledged % ARTF Canada/CIDA United Kingdom USAID World Bank Denmark Sweden/SIDA Australia Netherlands Finland Sub-Total Other IDA - World Bank DFID USAID/RAMP USAID/ARIES CGAP NOVIB Interest Income from Loan Funds + Bank Interest/Other Sub-Total Total Source of Funds Source: MISFA December State of Microfinance in Afghanistan

35 Chapter 5: Demand for Microfinance Services Estimates about the demand for microfinance in Afghanistan differ widely. While many including the World Bank give estimates of the demand for credit, it is not clear what this estimate is based upon. In 2002, the World Bank estimated that over 1 million households demand micro-credit in Afghanistan. The National Risk and Vulnerability Assessment of 2005 found that 42% of all rural households take out loans. In a survey UNODC found that 45% of farmers intended to take out a loan in 2004, and the average of these loans in 2003 was $ The need for loans has been consistent across socio-economic groups: a majority of landlords, owner-cultivators, and the landless all expressed that they had previously taken out loans. 22 Farmers take out loans for fertilizer, food for the family, ashr (agriculture tax) payments, and contributions to local mullahs and merabs. 23 The peculiar characteristics of the cropping pattern in Afghanistan also impacts demand for microfinance services. Some reports state that evidence shows a strong correlation between the taking out of loans and poppy growing activity. In 2003, 50% of all poppy farmers reported having taken out loans while only 32% of all non-poppy farmers reported having taken out loans. 24 Moreover, the loans taken out by poppy growers were on average larger than those taken out by non-poppy growers. Poppy farmers had an average of US$740 in outstanding loans while non-poppy growers had an average around US$ 456. One factor which affects demand for credit negatively is the perception that interest is haram or unacceptable in Islam. More Sharia compliant products are likely to further increase the demand for credit. A review of the areas for which microfinance has been taken indicates that 63% has been used for trade and services, 11% has been for handicrafts and manufacturing, 10% for agriculture, 10% for livestock and 4% for household consumption purposes. Figure 12: The Stated Use of Micro Finance Funds 21[3] Afghanistan Opium Survey 2004, UNODC, November UNDCP, The Role of Opium as a Source of Informal Credit, Strategic Study #3, January Afghanistan Opium Survey 2004, UNODC, November Steven Oliver. Restructuring Supply in Afghanistan s Narco-Economy: Farmer Choice. May Institute of Microfinance (InM) 35

36 It is estimated that there are 4.2 million households in Afghanistan of which 3.3 million households live in rural areas and million households live in urban areas. Based on the UNDOC survey one could project that the current demand for credit in rural areas would be million households of the 3.3 million households and the annual credit amount would be around US$ 970 million per year. 25 The credit needs of urban households have also been estimated assuming that at least 50% of the households would demand credit. The credit for urban households would be in the range of US$ 334 million assuming the same average demand as in rural areas which is a conservative estimate. To this if one adds the credit needs in the livestock sector in which 73% of the rural households and 89% of the Kuchi households are involved the demand would further increase. At a minimum the credit requirements in Afghanistan would be around US$ 1.3 billion on an annual basis. Table 7: Estimating Credit Demand in Afghanistan HHs HHs Demanding Credit Credit Demand (US$) Rural Households 3,300,000 1,386, ,200,000 Urban Households 985, , ,750,000 Total Households 4,200,000 1,314,950,000 The formal microfinance sector is serving less than 400,000 clients currently or only 8% of the total. Savings services are offered to an even smaller client base. There is a large un-met demand in the sector. In terms of the volume of credit the gap between demand and supply would be much larger as the current outstanding loans in the formal sector is just over US$ 106 million against a demand of ten times that amount. There is a gap not just in terms of the volume of finance required but also in terms of the range of financial services required such as loans designed specially for agriculture, livestock or even the business sectors and there is lack of savings services and no insurance products. Clients also complain about the amount of loan provided. Most MFIs allow good clients to graduate rapidly through subsequent loan cycles with increasing loan sizes. Some MFIs have also introduced another loan product that is for individually owned enterprises, primarily managed by men, with loan sizes between $250 and $2000 to be repaid in installments over a year or more. Surveys in many other Islamic countries which are less conservative than Afghanistan such as Jordan, Algeria, and Syria revealed that percent of respondents cite religious reasons for not accessing conventional microloans. 26 Thus the demand for such finance is expected to be even higher in rural Afghanistan. The sector has developed a few Islamic modes of financing which address part of the client concerns about Islamic injunctions about interest rates but these services have a limited outreach and have been designed in a manner which makes them difficult and costly to administer. Eight of the current 15 MFIs include some kind of savings product for members of the groups. None of the MFIs have offered an insurance product. 25 Estimating and average credit demand of US$ 700 per borrower. 26 Nimrah Karim, Michael Tarazi and Xavier Reille. Islamic Microfinance: An Emerging Market Niche. August, State of Microfinance in Afghanistan

37 In almost all cases loan repayment starts almost immediately and repayments are on a weekly, bi-weekly or monthly basis. This implies that only those households can obtain loans that have at least one member in the household with a regular source of income. This generally excludes the poor with no regular source of income. While the microfinance sector in Afghanistan has played a commendable role in ensuring that a majority of its clients are women, it has not been very good at following up and ensuring that its loans are actually suitable for use by women. As such a majority of its loans, even those given through women are actually used by men. Generally interest rates depending on terms and type of product/guarantee or lack thereof range from 1.4 2% flat per month or 17% to 24% flat per annum. In justifying their interest costs, the MFIs in Afghanistan maintain that the interest rates and charges reflect the costs of doing business in a high security risk, dispersed population, high wage and food inflation and of adopting an Islamic approach which entails higher costs due to the fact that female loan officers require Maharams and the Murabaha transactions have higher administrative costs, etc. There has been some downward pressure on pricing, particularly in Kabul due to competition among the MFIs. Institute of Microfinance (InM) 37

38 Chapter 6: Impact Overview There is lack of sufficient data in Afghanistan to properly assess the impact of microfinance services. While each MFI uses its own formats for collecting data and consolidating and analyzing the information gathered from prospective and actual clients, they do not use this in any systematic manner to assess impact. BRAC, for example, collects baseline data on each client and uses the information to approve the initial loan but not to examine social outcomes and act over time. In addition to baseline-type data some MFIs collect information about their clients at subsequent loan cycles. However, some MFIs invest considerable time and resources in collecting this information none of them input this baseline and monitoring data in an electronic format that can be easily analyzed. Most of the information on impact is generally reported on the basis of individual case studies. There are very few surveys available which examine the impact of microfinance in Afghanistan. BRAC, the largest MFI in terms of clients of microfinance in Afghanistan has recently completed a draft report on impact assessment of its microfinance activities. This report has been circulated for comments but is not yet available for public circulation. 27 BRAC reports that its study found that microfinance has positive impacts on per capita expenditure and food security, indicating programme participation and reduced poverty in the client households. The study also reveals that microfinance participation helped the client households to accumulate assets and diversify income sources. BRAC also found that the programme has positive impact on empowerment of the client women. The First MicroFinance Bank of Afghanistan, the largest in terms of volume of funds has not undertaken any specific impact studies but periodically reports case studies of individual clients who have benefited from its programme. In addition, smaller organizations like PARWAZ reports that it has been included in a World Bank survey but the study is not yet available. 28 There are two ongoing qualitative reports which are examining the impact of microfinance in Afghanistan, both with a particular focus on women. One study is being funded by the Danish government and the other by Afghanistan Research and Evaluation Unit (AREU), with support from DFID. These reports have not been made available for circulation. MISFA commissioned a survey at the end of September This represents the largest survey in terms of attempting to examine the impact of microfinance in the country. MISFA s study attempts to establish a baseline database of clients to assess and measure the impact of MISFA's microfinance program in Afghanistan. One of the objectives of the study was to identify key socio-economic indicators that microfinance institutions could use to track the well-being of their clients. The study interviewed 1,019 households across 5 regions of Afghanistan. It revealed that the microfinance program 27 The quarterly newsletter of the Research and Evaluation Division of BRAC. Volume 7 No. 3. September Annual Report PARWAZ. 38 State of Microfinance in Afghanistan

39 has empowered beneficiaries both socially and economically and has created substantial employment opportunities. Highlights of the MISFA Survey on Impact 70% of the program beneficiaries are women; 40% of clients are located in rural areas; More than 80% of the loans were used for setting up businesses or expanding them; 47% of urban clients and 39% of rural clients generated employment opportunities for others; 72% of the clients reported an improvement in their economic situation; 44% women clients reported absolute control over their money; 80% women clients reported improved attitude of their husbands and other relatives, both male and female. Impact on Women While the MISFA survey shows very impressive results with respect to its impact on women, others 29 who have looked into the sector in Afghanistan caution that lending to women in Afghanistan only implies that all transactions related to the disbursement and repayment of loans is done with women, and not that loans are actually controlled by women. In many cases, the work within the household is shared with women undertaking production and men taking responsibility for selling products in the market. Women tend to rely on other household members or relations in the community to link with product suppliers and retail markets. In these cases, lending to women may increase their status within the family and the community, but the loan is supporting a broader family or social group. Since it is also common for households to rely on multiple income sources and enterprises to draw on the labor and input from different family members, it is difficult and expensive to track loan use and nearly impossible to isolate exactly who is in control. The reports of PARWAZ highlight the fact that the participation of women should be seen in its proper context given the situation of women just a few years ago. PARWAZ reports that its clients who are all women are able to undertake business activities such as agricultural endeavors, home based tailoring services, livestock, carpet weaving, jewelry making and shop keeping. Clients report higher income, an increase in household assets (such as home electronic goods, cell phones, household items, etc.). They also state they can go out and obtain contracts with local store owners for goods such as children s, women s and men s clothing, handicrafts, quilts, pillows, rugs, and dairy products among other things something unheard of for women to do just 2 years ago. In fact, just 5 years ago, it was unheard of for women to be entrepreneurs in Afghanistan. Women also state that they are respected more by their husbands, extended family members, and their neighbors since taking a loan. What we find most heartening though is that clients can now afford to send their children to school as opposed to having them work or beg in the streets and they can take care of their medical expenses, something they could not do before. The overall trend is that women have more confidence now than before taking the loan and they take great pride in the fact that they can provide for their families. PARWAZ reports that to substantiate its findings, the 29 Nagarajan, Geetha, Henry Knight and Taara Chandani. Institute of Microfinance (InM) 39

40 World Bank has recently commissioned a study to really measure the impact of microfinance in Afghanistan and PARWAZ is one of the partners in this study. 30 Impact on Poverty In Afghanistan MFIs reach clients that are only slightly above the lower-end of the poverty strata. The average depth of outreach (measured by percentage of average loan size to GNP per capita) in Afghanistan is about 27% and compares well with South Asian countries with similar poverty levels. 31 While MFIs in Afghanistan have attempted to reach the poor there is some dilution in this objective as the growing loan size indicates. While MFIs broadly articulate missions around poverty alleviation and indeed report a depth of outreach that compares favorably with many South Asian and Arab countries, they are not explicitly targeting services to extremely vulnerable or marginalized communities. Like in many other countries, client selection is based primarily on ability to repay rather than relative vulnerability. To minimize risk to their loan portfolio, MFIs emphasize the creditworthiness of potential clients rather than their vulnerability. Clients are screened by a combination of physical and social capital, including household or enterprise assets such as an existing retail business, and ownership of land or ability to lease land; and social reputation, through entry and participation in a solidarity group, and backing from community leaders or the local Shura. 32 Some MFIs, such as MADRAC, institute compulsory savings before loan disbursement as a way for new clients to build their creditworthiness MFIs, nonetheless, reach underserved clients through broad geographic targeting. Most MFIs are working in lowincome peri-urban districts that have a high concentration of poverty and where the demand for small loans (between $100 and $600) is very high. The Afghanistan Rural Microfinance Program (ARMP), whose average loan size at US$600, is considerably higher than other MFIs, has mandated some portion of their loans to exclusively reach poor clients in the service areas. It provides staff incentives to ensure that poor clients are served: to qualify for a performance bonus, loan officers have to demonstrate that at least 25% of their portfolio comprises clients who earn less than $1 a day. Even without explicitly targeting the poor, however, many MFIs are indeed reaching households with no prior access to affordable financial services. Financial services are an important part of a poor household s livelihood and coping strategies so extending these services to people without access fulfills a social responsibility. Those who have looked at the sector in Afghanistan feel that to reach extremely vulnerable populations, MFIs will require appropriate incentives, additional resources and partnership support. 33 If MFIs choose (or are encouraged) to increase the depth of outreach to harder-to serve populations, they will need to develop appropriate products through market research, offer additional services such as entrepreneurship training and develop linkages with other agencies which offer Business Development Services, product suppliers, etc. MFIs will require dedicated investments in research, MIS and personnel to modify the scope of their portfolio and measure social performance. Pursuing this on a significant basis would represent a different strategy to the more laissez-faire approach of fast-tracking the development of the industry. 30 Parwaz, 2006, Annual Report. 31 Source: South Asia Report, The MIX, Nagarajan, Geetha, Henry Knight and Taara Chandani. 33 Nagarajan, Geetha, Henry Knight and Taara Chandani. 40 State of Microfinance in Afghanistan

41 Chapter 7: Regulatory Frameworks The government of Afghanistan has taken a very proactive role in establishing and promoting the microfinance sector in the country. The Government recognized that the Afghan economy has been largely dominated by money lenders in the absence of formal banking systems and there was a need to provide alternatives. Afghanistan does not have specific regulations to address microfinance activities and diverse laws apply to the different providers of microfinance services. These include the Central Banking Law and the Commercial Banking Law which were promulgated in September 2003 and apply to banks. Most MFIs registered as NGOs operate under the June 2005 law on NGOs which established a new legal framework, replacing the previous Regulation for the Activities of Domestic and Foreign NGOs in Afghanistan enacted in 2000 under the Taliban regime. This new regulatory framework previews two different types of registered, non-governmental and not-forprofit organizations with legal entity status. The formal micro-finance sector emerged in Afghanistan in 2002 as part of the rehabilitation process to provide social protection and alternative means of livelihoods to the poor. In the absence of microfinance expertise within the country, international NGOs were invited and supported to establish the microfinance sector in the country. The Micro-credit and the establishment of a formal and sustainable financial system is a priority for the current Government. The GoA recognises that access to resources for further investment in licit livelihoods is crucial to tackling both opium dependency and poverty reduction as well as to promote growth. Securing Afghanistan s Future Plan assigns a particular role to finance and micro-credit to achieve expected rates of growth. As a result the Government has been very supportive of MISFA and has helped in the flow of funds to it through the donor community. The growth of the sector in Afghanistan was phenomenal and stands first compared to many conflict affected countries such as Bosnia and Herzegovina, Mozambique, Uganda, Sierra Leone, and Liberia in their early stages of recovery. However, in its present form the microfinance sector in the country is very much subsidized by MISFA and the sustainability of MFIs is a critical issue in future growth. While there is no special micro-finance legislation in the country, the existing policies are such that micro-finance banks committed to microfinance feel they can enter the market. This is illustrated by the entry of two specialised banks which cater to the microfinance sector. The First Microfinance Bank, Afghanistan was the first licensed microfinance bank in Afghanistan which has been incorporated as a full service commercial bank with micro finance being its main area of focus. The FMBA was incorporated in 2003 with considerable help and financing from the IFC and KFW. A technical assistance package has been secured from donors in order to overcome some of the short-term constraints imposed by the Afghan environment, in particular with respect to security, gender outreach, the lack of infrastructure, and training of staff. At the end of 2006, BRAC also established the BRAC Afghanistan Bank (BAB) with a focus on small business lending but its portfolio has expanded to include a range of credit and savings products. In addition to this supportive legal environment the Government of Afghanistan has taken other measures to support the fledgling microfinance industry. In 2006 the central bank published the Deposit Taking Microfinance Institutions regulations under the Banking Act that will allow MFIs to eventually Institute of Microfinance (InM) 41

42 transform into specially-regulated deposit-taking microfinance institutions, and from there to full commercial banks should they wish. 34 In July 2006 the Legislative & Regulatory Division of Da Afghanistan Bank announced Article Twelve: Licensing, Regulation, and Supervision of Depository Microfinance Institutions. This states that DMFIs, which take deposits and make loans, would normally be subject to Article 2.1 of the Law, which states that no person shall engage in the business of receiving money deposits or other repayable funds from the public for the purpose of making credits or investments for his own account in Afghanistan without a banking license issued by Da Afghanistan Bank However, DMFIs are hereby deemed to qualify for exemption from Article 2.1. In order to be considered a DMFI and be licensed, regulated, and supervised under this regulation, it is not necessary for the microfinance institution to engage in every permitted activity of a DMFI. Accordingly, microfinance institutions that accept only mandatory deposits or no deposits at all may voluntarily choose to be licensed as DMFIs, and DAB will consider their license applications and regulate and supervise these institutions under the same set of requirements as if they were actually taking voluntary deposits. A Depository microfinance institution (DMFI) is defined under this article as a legal entity that accepts voluntary savings deposits only from a membership defined by a common bond, such as employment at the same legal entity or defined groups of entities or in the same occupation, or residence within the same delineated community, and grants micro-credits only to that same membership. Microfinance institutions that accept only mandatory deposits from members are not considered to be DMFIs. Microfinance institutions that accept only mandatory deposits or no deposits at all may voluntarily choose to comply with these regulations in order to receive a license from DAB, and shall also be considered DMFIs for purposes of this regulation. No MFI has as yet applied for regulation under this article. The FMFB which has around 52% of the total savings of the sector is already licensed as a bank and cannot benefit from this new law. BRAC could potentially benefit from this regulation as it has 38% of the total savings in the sector and also has a membership approach which would make it an ideal candidate to use member deposits as a source of financing. However, BRAC has registered a BRAC Bank in Afghanistan and may simply transfer member deposits to the new entity. Other MFIs do not adopt a membership approach and have less than 10% of total savings in the sector as a whole and therefore do not really stand to gain from this legislation. 34 IDA State of Microfinance in Afghanistan

43 Chapter 8: Challenges Facing the Sector Overview The micro-finance sector in Afghanistan is at a cross-road today. The sector has enjoyed strong backing from the Government and donors and sought to follow microfinance s best practices, and build the capacity and capital base of MFI s. The deliberate approach to encourage rapid scaling has led to rapid client outreach and the resulting growth is impressive and stands first when compared with conflict-affected countries. The attempt by many in the MFI sector to target women has demonstrated that when concerted attempts are made to reach women clients this is possible even in a country like Afghanistan which harbours extremely negative views about women s economic participation. However, despite this performance most analysts agree that this growth has come at a cost. The sector faces many challenges today. These challenges include excessive reliance on one agency for funding, lack of staff capacity and weak management systems, low level of sustainability and rising portfolio at risk, delivery strategies which impose a high cost on the borrower, limited product range and lack of information on how women are actually benefiting from the loans. The key stakeholders have begun to appreciate some of these challenges which are outlined in this section. Weak Management and Implementation Capacity Lack of experience in country was a principal reason that reputable international MFIs with experience of microfinance in developing countries were encouraged to start microfinance operations in Afghanistan. Regardless of the level of experience at higher tiers of management, international agencies also have to recruit local staff at the field level. The rapid growth in the microfinance sector has led to recruitment of staff which is not properly qualified especially at the level of the loan officers. In Afghanistan like in most other countries there is no tailor made training for this level of tier of staff. Organizations which recruit women at the field level such as BRAC face a more acute problem as they have to recruit from a pool of women with limited or no training or experience of any kind. Furthermore, some organizations intentionally choose staff with limited experience as a cost cutting strategy. While MISFA has been mandated to undertake capacity building of the MFI sector as one of its prime objectives, its capacity to provide training at the field level is also limited. BRAC and some of the other MFIs do provide some training to staff but training by MISFA and the MFIs cannot compensate for weak staff capacity. A review of the sector by donors commented that the effectiveness of the training programs of MISFA could not be assessed as it does not carry out formal follow-up. 35 Portfolio at Risk The portfolio at risk reported by the MFIs in Afghanistan is an area of serious concern. At the end of December the overall portfolio at risk of the sector was 10.5% with some MFIs reporting alarming PARs such as FINCA (47%), Sunduq (36%) Madraq (29%), Parwaz (24%), AMFI at 20%, ARMP (17%) and MOFAD (11%). There 35 Nagarajan, Geetha, Henry Knight and Taara Chandani. Institute of Microfinance (InM) 43

44 are various reasons reported for this high PAR, one of the principal reasons is weak internal management capacity, internal fraud, target oriented disbursements which did not properly assess clients, ghost clients, inability of borrowers to pay due to worsening economic situation, etc. To address the need for more careful monitoring, the MISFA monitoring unit has been strengthened and its scope has been enhanced. MISFA has produced individual performance reports for each of the MFIs and has been holding individual discussions with MFIs to discuss their performance. These discussions have included reviewing progress made so far, assessing their achievements with respect to targets, discussing management and financial issues that emerge from the reports, and reassessing growth more realistically. Sustainability The focus on first achieving wide geographic coverage appears to have delayed sustainability objectives in the microfinance sector. At the end of December 2008, three MFIs had an Operational Self-Sufficiency (OSS) ratio of over 100%. For the sector as a whole the OSS was 79% at the end of December However, this ratio is expected to drop in the future as MFIs scale back their expansion plans and focus on improving portfolio quality. Inherent challenges to achieving sustainability in Afghanistan result from the high operating costs of the MFIs that will need to be addressed. However, there are some factors which are outside the control of individual MFIs such as the lack of security, limited economic opportunities, the extreme discrimination against women, destruction of the physical infrastructure, inadequate marketing infrastructure, etc. The MFI sector in Afghanistan is currently focusing its service provision in Kabul and major towns in the North. The problem of cost control is likely to be a major issue for coverage to rural areas where the population density is only 40 people per square kilometer. Limited Source of Financing MFIs depend heavily on MISFA as a source of funds to finance their lending operations. Loans from MISFA to MFIs account for more than 90% of the MFIs portfolio outstanding. Any disruption in loan funds from MISFA can adversely affect MFIs operations unless they can secure alternative funding sources. For example, in 2005 MRRD / MISFA did not receive enough funding to meet the funding requirements identified under contracts that had been signed with MFIs, and much of what was provided came at the very end of the year. As a result of the disruption in fund availability to MISFA, of the US$ 129 million indicated in contracts with MFIs, only US$ 24 million (18%) were disbursed. Funding delays are now suggested to be one of the major reasons that limited expansion of the MFIs. Donor commitments generally fall short of the volume of funds required by MFIs in their business plans. MFIs report that this also leads to a loss of their credibility when they cannot honour their commitments to clients. MFIs in Afghanistan have not demonstrated the capacity to generate member savings or mobilize deposits which could then be used as a source of financing. While the Afghan Government allows the licensing of a Deposit Taking Microfinance Institutions under the Banking Act, none of the MFIs have registered under this regime. Most MFIs in Afghanistan do not have savings programmes and no plans to pursue member deposits as a strategy for mobilizing resources. 44 State of Microfinance in Afghanistan

45 Ability to Attract Foreign Financing It was a correct strategy of the initial Government efforts for developing the microfinance sector to deliberately choose international microfinance institutions (MFIs) to establish new green field initiatives in Afghanistan while building capacity of local Afghan MFIs. It is clear that the strategy has facilitated achieving scale rapidly, demonstrated good practices, and helped build local capacity. There are now four MFIs (Parwaz, WWI, AFSG and MADRAC) managed by Afghans. Parwaz is also owned and fully staffed by Afghans. The objective of government in this regard is to encourage MFIs, especially those that are benefiting from grant funds, to establish permanent forms of organization in the country. The form of incorporation for most MFIs is the limited liability company registered under the regulations of the Ministry of Commerce. These are non-distributive companies but with limitations on the distribution of dividends only for the first five years. Whereas this form of organization will be helpful to building domestic institutions that are staffed with nationals, the form may be less attractive for foreign investors concerned with realizing fast returns on their invested funds. Conditions in Afghanistan still haven't reached a point where international social investment funds or large international banks with microfinance investment programs are ready to sign on. However, some MFIs have strong balance sheets and solid portfolios and are therefore likely to attract some financing. Narrow Product Range While a few organizations have developed some interesting products and delivery strategies one of the most common refrain in the sector is that the amount of loan is too small, the repayment period too short and the scheduling of repayments is too soon. While some organizations are experimenting with a few innovative products such as FINCA with Islamic products, the range of the products that is offered is generally very narrow and does not always meet the requirements of the different activities for which the loan has been taken. For example, few organizations have developed a product to address the needs of the livestock sector where one of the key constraints is winter feed. Thus farming households have to sell the animals at a low price. MFIs have focused on credit to the exclusion of other types of services such as savings, insurance, etc. There is need to design better financial products and develop risk mitigation measures for clients faced with high risk. Re-examination of Delivery Strategies Many of the strategies that are being used in Afghanistan have been imported from elsewhere. While some are working effectively there is need for a re-examination of some of these to assess how these are actually working in the local environment and whether there is a need for modifying them to respond more effectively to the local context. This is particularly important for MFIs which are seeking to target women. Too often MFIs use strategies without fully appreciating that this imposes an additional cost on the client. This begins to manifest itself in poor client loyalty, high client drop-out, high PAR and low impact. There was no evidence that there had been a comparative assessment of the approaches that used the individual, solidarity group, village level banking models. Institute of Microfinance (InM) 45

46 Outreach to Rural Areas A major challenge for the microfinance sector in Afghanistan is its concentration in a few areas such as Kabul and a few towns in the northern parts of the country. Large parts of the country are uncovered. Providing coverage to other parts of the country is a special problem because of lack of security, poor physical and institutional infrastructure and low population densities. Afghanistan has a population density of 119 per square miles which is one tenth of that of Bangladesh and makes it extremely difficult to provide financial services in a cost effective manner outside the urban areas. This represents a special challenge for the country and requires innovation in terms of products, delivery strategy and use of communication and information technology. Impact on Poverty While a few reports have been generated on the impact of the sector on poverty alleviation more work needs to be undertaken in this regard. There is need to undertake proper cost/benefit analysis and assess the returns to investments in trade, cereal crops, horticulture and livestock sectors and areas in which credit is most often deployed. Only an examination of this sort will indicate whether the poor farming communities can bear the interest costs currently being charged by the MFIs and the extent to which the provision of services has an impact on poverty. Impact on Gender The microfinance sector in Afghanistan especially prides itself on reaching women given the difficult position of women in the country. While some of the organizations target women only and the sector has an overall outreach to women of 63%, the impact on women is not properly documented. There is need for a better understanding of who is actually using these loans and the specific impact they have on women s empowerment, social status, productivity and incomes. The experience of many other countries indicates that the loans, even when they are being given to women, are not always used by them but are often passed on to household men. In Afghanistan this issue has not been carefully examined and there is a need to look at this carefully. Strengthen Capacity of Support Organizations The microfinance sector needs a few strong support organizations which can help to develop the capacity of the MFIs. The Afghanistan Microfinance Association (AMA) has been established to help in providing training for building staff capacity, strengthening monitoring and evaluation capacity in the sector, promote transparency, enhance industry standards, monitor industry benchmarks, disseminate knowledge and information sharing. Such an institution can also help MFIs evaluate their performance, identify areas to improve, and urgently develop strategies to reduce costs of operations and become sustainable. Such an organization could also help in product innovation, process reengineering, broad applications of new technology, and creation of new strategic alliances will all be essential for the MFIs to develop a strong microfinance sector in Afghanistan. The MFIs need to actively support Afghanistan Microfinance Association (AMA) to grow and assume a visible role in lobbying, training, the gathering of performance statistics and other functions that are currently performed by MISFA. 46 State of Microfinance in Afghanistan

47 Annexure Institute of Microfinance (InM) 47

48 List of Annex Tables Table 1.A A Summary Table 2005 to 2008 Table 1.B Amount of Savings by MFI Clients Table 1.1 Portfolio Summary by MFI (December 2008) Table 1.2 Income Statement by MFI (December 2008) Table 1.3 Balance Sheet by MFI (December 2008) Table 1.4 Portfolio Summary by MFI (December 2007) Table 1.5 Outreach Indicators (December 2006) Table 1.6 Key Performance Ratios (December 2006) Table 1.7 Portfolio Summary (December 2006) Table 1.8 Outreach Indicators (April 2006) Table 1.9 Key Performance Ratios (April 2006) Table 1.10 Portfolio Summary (April 2006) Table 1.11 Outreach Indicators (December 2004) Table 1.12 Financial Indicators (December 2004) 48 State of Microfinance in Afghanistan

49 Table 1.A - Summary of Microfinance Growth and Portfolio Quality Outreach Provinces Districts Active Clients 192, , , ,092 Active borrowers 160, , , ,692 Client dropout (cumulative) 69, , , ,663 No. of loans disbursed (cumulative) Amount of loans disbursed, $ (cumulative ) 321, , ,744 1,317,038 71,536, ,409, ,331, ,240,936 No. of loans outstanding 160, , , ,904 Gross Loans outstanding, $ 27,623,763 51,653, ,927, ,373,056 Client Savings outstanding, $ 2,956,353 4,990,573 11,416,667 14,603,226 Outreach - Vulnerable Section Women Clients 139, , , ,719 Widow clients - 4,177 3,370 2,191 Disabled clients Returnee clients 3,114 11,316 13,174 13,872 Women as % of Total Clients 72% 74% 66% 63% MFI Resources employed Branches Male staff - 2,519 2,878 Female staff 1,869 1,931 Total staff 2,284 3,047 4,388 4,809 LOAN PORTFOLIO Cumulative Principal Amount due (demand), $ Cumulative Principal Amount received, $ 20,945,495 8,537,369 20,364, ,492,582 20,611,293 7,942,375 18,396, ,721,989 Cumulative Principal prepaid, $ 6,477 2, , ,289 Institute of Microfinance (InM) 49

50 Cumulative Number of loans overdue Number of loans written-off 76 11,526 13,684 48, , ,553 5,662 Amount of loans written-off (cumulative), $ 8, ,285 1,182,042 PORTFOLIO AGEING (Principal Balances,$) Current (loans having no overdue) , ,075,717 95,250,643 91,556,264 Amount of loans rescheduled 17, ,714,877 3,188, , days late 853, ,881 3,737, days late 594, ,986 2,859, days late 881,641 1,035,199 2,880,834 >180 days late 1,535,214 1,840,733 5,462,519 Total 817, ,655, ,927, ,844,997 LOAN LOSS RESERVE (Total) 9, , ,376,008 9,686,361 Outstanding Number of Loans by Size: AFS 15, , , , ,780 AFS 15,001-50,000 31,073 61, , ,600 AFS 50,000 2,542 7,583 35,550 46,516 Total 160, , , ,896 Outstanding Amount of Loans by Sector ($): Trade and Services 14,307,464 28,589,898 63,140,585 67,478,751 Household consumption 3,395,073 4,525,981 Handicrafts and Manufacturing 4,434,560 6,680,341 14,258,499 11,977,172 Agriculture 3,097,705 5,497,650 7,732,395 10,829,380 Livestock (small & large animals) 5,203,335 9,628,532 12,710,691 10,879,846 Others 567,155 1,257,072 1,690,744 1,073,726 Total 27,610,219 51,653, ,927, ,764, State of Microfinance in Afghanistan

51 Productivity Indicators Loan Outstanding Per Branch 175, , , ,877 Loan outstanding per borrower, $ Portfolio per staff, $ 12,094 16,952 23,457 22,201 Active borrowers per staff Cost per active client, $ 9 10 Portfolio Quality Cumulative repayment rate, % 98% 93% 86% 95.20% PAR (>30 days), % 1.24% 1.16% 4% 10.5% Loan loss reserve ratio, % 1.35% 1.6% 3% 9% Profitability (quarterly) Monthly Monthly Monthly Quarterly Yield on portfolio, % 2.9% 0.0% 3% 27.3% Operating expense ratio, % 15.0% 2.6% 3% 32.7% Operational self-sufficiency, % 47.4% 0.0% 90% 79.4% Other Capital adequacy ratio, % 4.7% 23% 0.0% OSS (12-month Rolling Average) 80% Institute of Microfinance (InM) 51

52 Table 1.B Amount of Savings by MFI Clients ($) MFI Ariana Financial Services(AFS) Afghanistan Rural Microcredit Programme (ARMP) Bangladesh Rural Advancement Committee (BRAC) ,262,429 4,649,122 5,744,960 5,596,627 Child Fund Afghanistan (CFA) 170, ,464 Foundation for International Community Assistance (FINCA) The First MicroFinance Bank(FMFB) 95,107 4,880,510 4,835,811 7,700,812 Microfinance Agency for Development and Rehabilitation of Afghan (MADRAC) Micro Finance Agency for Development (MoFAD) 106, , , ,448 OXUS Parwaz Microfinance Institution 12,648 32,613 69, ,770 Sunduq (Khadamati Mahally Sunduq) 134, ,754 World Council of Credit Unions (WOCCU) 242, ,088 Women for Women International (WWI) TOTAL 2,956,353 4,990,573 11,416,667 14,603, State of Microfinance in Afghanistan

53 Table 1.1 Portfolio Summary by MFI (December 2008) PORTFOLIO SUMMARY Dec-08 AFS AMFI ARMP BRAC CFA FINCA Outreach - Overall Provinces Districts Active Clients 11,181 3,896 21, ,806 20,145 38,499 Active borrowers 11,181 3,896 21, ,366 20,145 38,499 Client dropout (cumulative) 5, ,512-63,213 No. of loans disbursed (cumulative) 46,657 16, , ,063 56, ,031 Amount of loans disbursed, $ (cumulative ) 13,848,98 0 7,804, ,534, ,604, ,556, ,690,53 7 No. of loans outstanding Gross Loans outstanding, $ 3,521, ,612 15,352,70 27,310,454 3,366,897 5,330,780 9 Client Savings outstanding, $ ,596, ,464 - Outreach - Vulnerable Section Women Clients 7,653 1,563 2, ,154 9,947 20,229 Widow clients Disabled clients Returnee clients 864-6, Women as % of Total Clients 68% 40% 12% 86% 49% 53% MFI Resources employed Branches Male staff Female staff , Total staff , LOAN PORTFOLIO Cumulative Principal Amount due (demand), $ 10,300,65 0 7,032, ,611, ,139, ,489, ,619,57 4 Cumulative Principal Amount received, $ 10,298,85 6 6,901, ,244, ,006, ,189, ,255,32 7 Cumulative Principal prepaid, $ 243, Cumulative Number of loans overdue 806 1,296 4,972 50,598 4,463 21,477 Number of loans written-off (cumulative) ,347 Amount of loans written-off (cumulative), $ 34, ,945 34, , ,430 PORTFOLIO AGEING (Principal Balances,$) Current (loans having no overdue) 2,797, ,083 12,061,33 23,985,192 2,788,218 2,472,813 3 Amount of loans rescheduled , days late 441,460 49, ,434 1,240, , , days late 183,597 50, , , , , days late 69,636 52, , ,354 46, ,957 >180 days late 29,086 63,672 1,642,715 1,178, ,688 1,654,027 Total 3,521, ,752 15,352, ,310,454 3,366,897 5,330,780 Institute of Microfinance (InM) 53

54 LOAN LOSS RESERVE (Total) 198, ,616 2,604,189 1,922, ,995 2,101,519 Outstanding Number of Loans by Size: AFS 15,000 6,899 2,598 3,786 69,051 14,943 21,383 AFS 15,001-50,000 2,616 1,257 14,986 61,500 5,090 14,818 > AFS 50,000 1, ,133 9, ,298 Total 11,181 3,896 21, ,366 20,145 38,499 Outstanding Amount of Loans by Sector ($): Trade and Services 2,425, ,914 1,988,572 23,102,635 1,382,988 2,678,731 Household consumption Handicrafts and Manufacturing 432, , ,834 1,282, ,265 2,254,378 Agriculture 662,819 1,263 3,917,310 2,560,212 1,337,645 - Livestock (small & large animals) ,280, , Others , ,672 Total 3,521, ,612 15,352,70 27,310,454 3,366,897 5,330,780 9 Key Performance Ratios Productivity Loan outstanding per borrower, $ Portfolio per staff, $ 25,893 9,545 30,829 13,758 40,565 9,144 Active borrowers per staff Cost per active client, $ Portfolio Quality Cumulative repayment rate, % 98% 98% 97% 97% 97% 94% PAR (>30 days), % 8% 20% 17% 8% 10% 47% Loan loss reserve ratio, % 6% 16% 17% 7% 8% 39% Profitability (quarterly) Yield on portfolio, % 27% 36% 16% 33% 29% 34% Operating expense ratio, % 32% 58% 33% 24% 16% 110% Operational self-sufficiency, % 56% 41% 48% 100% 113% 49% Other Capital adequacy ratio, % 6% -20% 10% 3% 36% 75% OSS (12-month Rolling Average) 64% 35% 78% 94% 129% 48% PORTFOLIO SUMMARY Dec-08 MADRAC MOFAD OXUS PARWAZ SUNDUQ WOCCU Outreach - Overall Provinces Districts Active Clients 18,148 15,156 14,394 12,180 10,531 15,540 Active borrowers 16,250 11,062 14,394 12,180 10,407 4,800 Client dropout (cumulative) 11,811 1,649 20,342 19,113 9,688 2,371 No. of loans disbursed (cumulative) 43,219 31,007 44,556 46,982 33,664 14,760 Amount of loans disbursed, $ (cumulative ) 9,694,130 9,224,539 13,834,337 9,468,140 7,271,493 8,832,510 No. of loans outstanding State of Microfinance in Afghanistan

55 Gross Loans outstanding, $ 2,433,190 2,231,890 3,763,479 1,959,677 1,476,414 2,542,982 Client Savings outstanding, $ 171, , , , ,088 Outreach - Vulnerable Section Women Clients 7,749 15,156 7,392 12,180 4,694 2,796 Widow clients Disabled clients Returnee clients - - 1, Women as % of Total Clients 43% 100% 51% 100% 45% 18% MFI Resources employed Branches Male staff Female staff Total staff LOAN PORTFOLIO Cumulative Principal Amount due (demand), 7,491,129 7,678,331 9,248, ,825 3,784,488 6,183,214 $ Cumulative Principal Amount received, $ 7,230,940 6,489,655 6,683, ,890 2,606,798 6,285,528 Cumulative Principal prepaid, $ , ,904 Cumulative Number of loans overdue 6,674 2,001 29,683 3,830 7, Number of loans written-off (cumulative) Amount of loans written-off (cumulative), $ ,509 27,999 72,514 48,568 PORTFOLIO AGEING (Principal Balances,$) Current (loans having no overdue) 1,570,567 1,902,150 3,263,772 1,237, ,248 2,349,321 Amount of loans rescheduled days late 157,080 12,427 75, ,454 74, , days late 235,013 59,962 61, , ,575 46, days late 239, , ,932 87, ,145 35,785 >180 days late 230, , ,243 95,528 66,266 8,387 Total 2,433,190 2,231,890 3,763,479 1,959,677 1,476,414 2,542,982 LOAN LOSS RESERVE (Total) 476, , , , ,696 77,537 Outstanding Number of Loans by Size: AFS 15,000 14,102 7,439 9,872 10,502 4,193 1,127 AFS 15,001-50,000 2,148 3,623 3, ,683 3,179 > AFS 50, ,392 2, Total 16,250 11,062 14,394 12,180 10,407 4,792 Outstanding Amount of Loans by Sector ($): Trade and Services 989,934 1,923,489 2,809,284 1,506, ,603 1,295,644 Household consumption , Handicrafts and Manufacturing 598, , , , ,121 98,422 Agriculture 682,788 21, , , ,365 Livestock (small & large animals) - 35,045 86,179 35, , ,552 Others 162,184 79, Total 2,433,190 2,231,890 3,763,479 1,959,677 1,476,414 2,542,983 Key Performance Ratios Productivity Loan outstanding per borrower, $ Portfolio per staff, $ 16,330 29,367 23,670 13,065 18,689 37,397 Institute of Microfinance (InM) 55

56 Active borrowers per staff Cost per active client, $ Portfolio Quality Cumulative repayment rate, % 97% 85% 71% 35% 69% 98% PAR (>30 days), % 29% 14% 11% 24% 36% 4% Loan loss reserve ratio, % 20% 11% 10% 14% 20% 3% Profitability (quarterly) Yield on portfolio, % 20% 21% 33% 35% 4% 23% Operating expense ratio, % 55% 24% 38% 52% 41% 39% Operational self-sufficiency, % 22% 51% 64% 39% 10% 72% Other Capital adequacy ratio, % -4% -11% 11% 23% -30% 18% OSS (12-month Rolling Average) 30% 58% 63% 59% 14% 78% PORTFOLIO SUMMARY Dec-08 WWI FMBA Total Outreach - Overall Provinces Districts Active Clients 9,549 61, ,304 Active borrowers 9,549 36, ,904 Client dropout (cumulative) 5, ,663 No. of loans disbursed (cumulative) 45,179 92,620 1,317,038 Amount of loans disbursed, $ (cumulative ) 10,718, ,179, ,240,936 No. of loans outstanding Gross Loans outstanding, $ 1,273,196 35,046, ,764,857 Client Savings outstanding, $ - 7,700,812 14,603,226 Outreach - Vulnerable Section - Women Clients 9,549 13, ,719 Widow clients 815-2,191 Disabled clients Returnee clients 3,919-13,872 Women as % of Total Clients 100% 22% 63% MFI Resources employed - Branches Male staff ,878 Female staff ,931 Total staff ,809 LOAN PORTFOLIO - Cumulative Principal Amount due (demand), $ 4,325,017 5,587, ,492,582 Cumulative Principal Amount received, $ 4,252,841 5,887, ,721,989 Cumulative Principal prepaid, $ - 299, ,289 Cumulative Number of loans overdue 1, ,990 Number of loans written-off (cumulative) ,662 Amount of loans written-off (cumulative), $ 78, ,695 1,182,042 PORTFOLIO AGEING (Principal Balances,$) - 56 State of Microfinance in Afghanistan

57 Current (loans having no overdue) 1,120,251 34,114,095 91,556,264 Amount of loans rescheduled 50, , days late 42, ,087 3,737, days late 38, ,487 2,859, days late 21, ,686 2,880,834 >180 days late - - 5,462,519 Total 1,273,196 35,046, ,844,997 LOAN LOSS RESERVE (Total) 90, ,307 9,686,361 Outstanding Number of Loans by Size: - AFS 15,000 6, ,780 AFS 15,001-50,000 2,708 14, ,600 > AFS 50,000-21,990 46,516 Total 9,549 36, ,896 Outstanding Amount of Loans by Sector ($): - Trade and Services 929,433 25,164,992 67,478,751 Household consumption - 4,321,336 4,525,981 Handicrafts and Manufacturing 165,515 5,103,646 11,977,172 Agriculture 38,196-10,829,380 Livestock (small & large animals) 140, ,380 10,879,846 Others - - 1,073,726 Total 1,273,196 35,046, ,764,857 Key Performance Ratios Productivity Loan outstanding per borrower, $ Portfolio per staff, $ 12,732 54,167 22,201 Active borrowers per staff Cost per active client, $ Portfolio Quality Cumulative repayment rate, % 98% 100% 95.20% PAR (>30 days), % 5% 2% 10.5% Loan loss reserve ratio, % 7% 2% 9% Profitability (quarterly) Yield on portfolio, % 38% 28% 27.3% Operating expense ratio, % 55% 25% 32.7% Operational self-sufficiency, % 60% 130% 79.4% Other Capital adequacy ratio, % 2% 18% 0.0% OSS (12-month Rolling Average) 74% 120% 80% Institute of Microfinance (InM) 57

58 Table 1.2 Income Statement by MFI (December 2008) Dec-08 AFS AMFI ARMP BRAC CFA FINCA MADRAC OPERATING INCOME Income from Loans 80,283 21, , ,970 78, ,485 40,368 Other Operating Income - 49, , Interest on Investment , ,567 2,229 93,459 TOTAL OPERATING INCOME 83,233 26, , ,970 80, ,944 40,792 FINANCIAL EXPENSES Interest on Loan 78,808 10,323 8, ,989 15,599 59,785 16,740 Interest on Client Deposits (81,725) Foreign Currency Losses/(Gains) (20) 73,587 Provision for Loan Losses 66,890 35,494 (50,401) 66,298 20,000 78,832 61,802 TOTAL FINANCIAL EXPENSES 28,537 77,213 44, ,562 35, ,204 78,542 OPERATING EXPENSES Personnel Expenses 69,803 19, , ,852 19, ,874 81,100 Other Administrative Expenses 30,823 23, , ,787 11, ,672 33,678 Depreciation expense - 54,027 4,480 26,539 4,000 10,802 6,684 Allocated Headquarters Expenses (NICRA) , , ,557 TOTAL OPERATING EXPENSES 105,106 43, , ,089 35, , ,462 TOTAL FINANCIAL & OPERATING EXPENSES 182,319 87, , ,651 70, , ,004 OPERATING PROFIT/(LOSS) - BEFORE TAX (99,087) (60,886) (112,819) 13,319 10,027 (617,165) (159,212) Business Receipts Tax 8, ,036 2,970 1,938 Income Tax NET OPERATING PROFIT/(LOSS) - AFTER TAX (107,637) (60,886) (112,819) 13,319 5,991 (620,134) (161,150) NON-OPERATING INCOME & EXPENSES State of Microfinance in Afghanistan

59 Grants from MISFA (62,492) (13,319) 7,043 Grants from Other Sources ,619,210 Other Non-Operating Income (Expenses) Total Non-Operating Income - - (62,492) (13,319) TOTAL CONSOLIDATED PROFIT/(LOSS) - (107,637) (60,886) (175,311) - - 1,626,254 5,991 1,006,119 (161,150) Dec-08 MOFAD OXUS PARWAZ SUNDUQ WOCCU WWI FMBA Total OPERATING INCOME Income from Loans Other Operating Income Interest on Investment TOTAL OPERATING INCOME FINANCIAL EXPENSES , ,186 61,524-51,189 36, ,238 2,564, , ,550 4, , ,290-1,644 4,741 1,664 (90) - 377, ,606 42, ,932 66,265 1,664 52,649 41,391 1,500,091 3,547, Interest on Loan 15,262 19,473 18,916 24,789 10,084 11, , ,641 Interest on Client Deposits Foreign Currency Losses/(Gains) Provision for Loan Losses TOTAL FINANCIAL EXPENSES OPERATING EXPENSES Personnel Expenses Other Administrative Expenses Depreciation expense Allocated Headquarters Expenses (NICRA) TOTAL OPERATING EXPENSES ,315-99,741 21, (487) ,400 74,887 90,981 34, ,884-2,681 10,492 (358,364) 190, ,244 53, ,313 24,947 16,080 21,939 52,685 1,008, ,491 75,372 56,322 31,391 51,690 42, ,650 1,909,439 26,748 31,601 27,168 17,912 22,335 19, ,296 1,322,680 3,666 9,074 2,716 2,687 4,928 1,974 39, ,971-5, , ,006 59, ,265 86,206 51,990 78,953 67, ,340 3,566,096 Institute of Microfinance (InM) 59

60 TOTAL FINANCIAL & OPERATING EXPENSES OPERATING PROFIT/(LOSS) - BEFORE TAX Business Receipts Tax 166, , ,519 76,937 95,033 89, ,024 4,575,069 (123,188) (63,329) (169,254) (75,272) (42,384) (48,281) 520,067 (1,027,464) - 5,597 3, ,070 75, ,182 Income Tax ,860 86,860 NET OPERATING PROFIT/(LOSS) - AFTER TAX NON- OPERATING INCOME & EXPENSES Grants from MISFA Grants from Other Sources Other Non- Operating Income (Expenses) Total Non- Operating Income TOTAL CONSOLIDATED PROFIT/(LOSS) (123,188) (68,926) (172,567) (75,272) (42,384) (50,350) 357,499 (1,218,505) ,265 2,608-55, , , (10,060) 1,611, ,273 2,608 2,687 55,801 - (10,060) 1,722,752 (123,188) 52,347 (169,959) (72,586) 13,417 (50,350) 347, , State of Microfinance in Afghanistan

61 Table 1.3 Balance Sheet by MFI (December 2008) Dec-08 AFS AMFI ARMP BRAC CFA FINCA MADRAC ASSETS Cash and Bank Balances Gross Loans Outstanding Less: Loan Loss Reserve Net Loans Outstanding Interest receivable on loans Accounts receivable and other assets (Including investments) Gross Fixed Assets Less: Accumulated Depreciation Net fixed Assets TOTAL ASSETS LIABILITIES Deposits - voluntary savings Deposits - compulsory savings (loanlinked) Interest payable on funding liabilities (incl MISFA loans) Accounts payable and other liabilities Loans from MISFA 1,087,285 1,181,391 14,647,780 14,922,711 2,055,819 4,292,351 1,918,950 3,521, ,612 15,352,708 27,310,454 3,366,897 5,330,780 2,433,190 (236,795) (135,626) (3,167,361) (1,989,215) (286,430) (2,366,711) (458,548) 3,284, ,987 12,185,348 25,321,239 3,080,467 2,964,070 1,974, , , , ,130-25,728 80, ,653 75,811 4,897 18,923, , , ,529 1,252,652 1,214,473 83, , ,708 (142,542) (62,977) (669,740) (728,364) (44,870) (379,419) (179,891) 137, , , ,109 38, , ,817 4,534,865 2,004,206 28,010,008 41,222,080 5,285,160 26,815,447 4,167, ,596, , ,263 60,750 26, , , , , , ,776 20, , ,416-1,300,235 41,399 3,399,318 2,101,800 18,558,000 28,961,521 3,673,366 13,592,664 3,546,565 Institute of Microfinance (InM) 61

62 Loans from Other Sources Other Long Term Liabilities (incl deferred revenue) TOTAL LIABILITIES EQUITY (NET WORTH) Paid-in Capital Donated Capital from MISFA (Total) Donated Capital from Other Sources (Total) Operating Profit/(Loss) after Tax (Total) Reserves (e.g. those imposed by law, statutes, board decisions) Other Equity Accounts TOTAL EQUITY (NET WORTH) TOTAL LIABILITIES AND EQUITY Balance Sheet Equation 219,039-6,729, ,379 31,340 68,163 5,092, ,576 4,301,263 2,179,594 26,461,245 40,330,742 4,051,515 15,409,012 4,259, , ,868,050 1,960,152 3,344,357 9,027,202 88,200 9,289,264 2,290,649 84, ,470,437 - (1,718,993) (2,135,541) (1,795,594) (8,135,864) 226,193 (13,353,266) (2,382,657) ,602 (175,389) 1,548, ,338 1,233,645 11,406,435 (92,008) 4,534,865 2,004,206 28,010,008 41,222,080 5,285,160 26,815,447 4,167, Dec-08 MOFAD OXUS PARWAZ SUNDUQ WOCCU WWI FMBA Total ASSETS Cash and Bank 1,435,552 1,744,168 1,901, , , ,129 23,144,315 69,152,971 Balances Gross Loans Outstanding 2,231,890 3,763,479 1,959,677 1,476,414 2,542,982 1,273,196 35,046, ,373, State of Microfinance in Afghanistan

63 Less: Loan Loss Reserve (246,730) (363,354) (279,317) (628,716) (41,675) (90,205) (1,915,256) (12,205,938) Net Loans Outstanding 1,985,160 3,400,126 1,680, ,698 2,501,307 1,182,991 33,131,098 94,167,117 Interest receivable on , ,368 loans Accounts receivable 130, ,513 18, , ,571 1,603,886 37,823,493 60,523,025 and other assets (Including investments) Gross Fixed Assets 133, , , , , ,904 2,281,558 7,411,717 Less: Accumulated (127,037) (116,363) (53,541) (82,710) (59,456) (63,528) (1,340,430) (4,050,869) Depreciation Net fixed Assets 6, ,342 99,129 71,588 50,335 56, ,128 3,360,848 TOTAL ASSETS 3,557,938 5,595,148 3,699,951 1,813,630 3,249,846 3,012,382 95,040, ,008, LIABILITI ES Deposits - voluntary ,343-56,913,096 57,289,439 savings Deposits - compulsory 178, , ,754 41, ,511,927 savings (loan-linked) Interest payable on 39,344 50,231 43,568 49, ,596 31,057-1,991,506 funding liabilities (incl MISFA loans) Accounts payable and - 71,190 53,762-37, ,088 1,609,381 4,638,333 other liabilities Loans from MISFA 3,594,042 4,852,241 2,930,837 1,965,675 1,541,657 2,618,005 11,000, ,335,691 Loans from Other - 43, , ,836 33,458 16,000,640 23,687,071 Sources Other Long Term Liabilities (incl deferred revenue) - 124, ,503 71,588 50,231 93,613-6,300,376 Institute of Microfinance (InM) 63

64 TOTAL LIABILITIE S EQUITY (NET WORTH) Paid-in Capital Donated Capital from MISFA (Total) Donated Capital from Other Sources (Total) Operating Profit/(Loss) after Tax (Total) Reserves (e.g. those imposed by law, statutes, board decisions) Other Equity Accounts TOTAL EQUITY (NET WORTH) TOTAL LIABILITIE S AND EQUITY Balance Sheet Equation 3,811,835 5,141,835 3,231,440 2,339,595 2,747,291 2,966,220 85,523, ,754, , ,714 5,853,118 7,105,264-2,199,894 2,463,477 1,406,144 1,620, ,395 1,536,965 37,436, ,776 6, ,807 9,889 3,872,474 19,882,933 (2,453,790) (1,862,494) (1,353,510) (2,169,815) (149,823) (1,496,808) (180,433) (38,962,396) (209,973) 19,381 (190,593) - 10, ,194 46,161 (253,897) 453, ,511 (525,965) 502,556 9,545,159 25,282,226 3,557,938 5,595,148 3,699,951 1,813,630 3,249,846 3,012,382 95,068, ,036, (0) 28,240 28, State of Microfinance in Afghanistan

65 Table 1.4 Portfolio Summary by MFI (December 2007) Outreach - Overall Current Month Total AFSG AMFI ARMP BRAC CFA FINCA MADR AC MOFA D Outreach - Overall Provinces Districts Active Clients 424,802 9,292 4,404 30, ,022 16,290 63,570 16,301 13,717 Active borrowers 365,666 9,292 4,404 30, ,097 16,290 63,570 14,222 7,422 Client dropout (cumulative) 155,995 3, ,614 2,650 21,274 4, No. of loans disbursed (cumulative) 999,744 32,302 12,345 89, ,977 36, ,322 28,959 19,543 Amount of loans disbursed, $ (cumulative ) 369,331,396 7,896,9 84 6,315, ,187, ,079,7 39 8,561, ,935,4 64 6,000,10 0 4,850,0 52 No. of loans outstanding 365,666 9,292 4,404 30, ,097 16,290 63,570 14,222 7,422 Gross Loans outstanding, $ 102,927,986 1,948,9 91 1,109, ,690, ,015,2 38 Client Savings outstanding, $ 11,416, ,744,96 0 Outreach - Vulnerable Section Women Clients Widow clients Disabled clients Returnee clients Women as % of Total Clients MFI Resources employed Branches Male staff Female staff Total staff 2,812, , ,816,3 98 2,220,35 1 1,722, , , ,611 6,793 1,396 5, ,951 9,421 30,209 7,185 13,717 3, , , % 73% 32% 18% 89% 58% 48% 44% 100% , , , , , Institute of Microfinance (InM) 65

66 LOAN PORTFOLIO Principal Amount due (demand), $ 20,364, , ,80 2 Principal Amount received, $ 18,396, , ,58 2 Principal prepaid, $ 3,523,78 4 2,566,00 3 3,282,61 9 3,132, , ,92 4 3,508,72 2 2,337, , , , , , Number of loans overdue 48, ,260 28,952 1,059 6,406 2, Number of loans written-off (cumulative) 1, , Amount of loans writtenoff (cumulative), $ 141,285 22, , PORTFOLIO AGEING (Principal Balances, $) Current (loans having no overdue) 95,250,643 1,794,7 925,77 19,236,8 22,767,7 2,714,0 9,299,54 2,146,56 1,708, days late days late days late days late days late >365 days late Total 3,188, , , , ,373 13,226 1,642, , ,881 2,263 37, , ,340 10, ,002 16, ,986 1,003 29, , ,358 4, ,946 10, ,035,199 2,511 16, , ,486 4, ,606 15,031 3,836 1,029,492 7, ,986 53,487 65,397 68,850 6,225 3, , , , , ,927,986 1,948,9 91 1,109, ,690,5 27 LOAN LOSS RESERVE (Total) 4,376,008 41,582 55,719 1,097,84 3 Outstanding Number of Loans by Size: $300 $301-1,000 $1,000 Total Outstanding Amount of Loans by Sector ($): Trade and Services 25,015,2 38 1,544,25 3 2,812, ,816,3 98 2,220,35 1 1,722, , ,133 51,157 28, ,781 5,164 1,563 5,421 94,092 14,449 35,308 13,505 4, ,335 4,128 2,715 21,349 43,630 1,810 24, ,401 35, ,949 5, , ,666 9,292 4,404 30, ,097 16,290 63,570 14,222 7,422 63,140,585 1,519, ,21 4 4,637, ,029, ,25 6 5,937, ,560 1,460, State of Microfinance in Afghanistan

67 Household consumption (food, medical, house repair, education, etc.) Handicrafts and Manufacturing 14,258, , ,62 0 Agriculture 3,395, ,732,395 64, , ,712 1,720,80 4 3,802,29 8 Livestock (small & large animals) 12,710,691-35,506 11,590,9 49 Others Total Key Performance Ratios Productivity 656, ,993 1,279,5 99 4,997, , , ,890 12, , ,352 1,690, , , ,443 84, ,927,986 1,948,9 91 1,109, ,690, ,015,2 38 2,812, ,816,3 98 2,220,35 1 1,722,3 60 Loan outstanding per borrower, $ Portfolio per staff, $ 23,457 22,148 20,175 43,929 12,802 45,359 17,931 14,704 26,912 Active borrowers per staff Cost per active client, $ Portfolio Quality Current repayment rate, % 86% 99% 77% 73% 95% 79% 67% 81% 94% PAR (>30 days), % 4% 1% 8% 6% 7% 3% 7% 2% 1% Loan loss reserve ratio, % 3% 2% 5% 5% 6% 3% 6% 2% 2% Profitability (for the month) Yield on portfolio, % 3% 3% 3% 2% 3% 3% 4% 1% 2% Operating expense ratio, % 3% 3% 5% 1% 2% 1% 5% 2% 3% Operational self-sufficiency, % Other 90% 83% 44% 106% 114% 130% 52% 43% 60% Capital adequacy ratio, % 23% 0% 34% 52% 4% 33% 63% 0% 0% Outreach - Overall OXUS PARWAZ SUNDUQ WOCCU WWI FMBA Hope for Life Outreach - Overall Provinces Districts Active Clients 11,026 12,288 12,465 6,596 13,612 33,288 2,212 Active borrowers 11,026 12,288 11,305 2,591 13,612 23,616 2,212 Institute of Microfinance (InM) 67

68 Client dropout 6,012 8,440 3,356 1,781 1, (cumulative) No. of loans 25,817 31,996 25,530 7,458 32,232 55,517 6,932 disbursed (cumulative) Amount of 6,062,929 5,314,944 5,455,278 4,245,770 7,070,917 89,377,040 1,978,149 loans disbursed, $ (cumulative ) No. of loans 11,026 12,288 11,305 2,591 13,612 23,616 2,212 outstanding Gross Loans 1,887,958 1,667,946 1,919,982 1,228,422 1,486,264 27,009, ,801 outstanding, $ Client - 69, , ,416-4,835,811 - Savings outstanding, $ Outreach - Vulnerable Section Women 5,915 12,288 5, ,612 6,317 1,305 Clients Widow clients , Disabled clients Returnee , clients Women as % 54% 100% 43% 8% 100% 19% 59% of Total Clients MFI Resources employed Branches Male staff Female staff Total staff LOAN PORTFOLIO Principal Amount due (demand), $ Principal Amount received, $ Principal prepaid, $ Number of loans overdue Number of loans writtenoff (cumulative) Amount of loans writtenoff (cumulative), $ 492, , ,468 3,057, ,321 3,616,550 59, , , ,198 3,015, ,979 4,541,950 58, , , , , ,176-23, State of Microfinance in Afghanistan

69 PORTFOLIO AGEING (Principal Balances, $) Current (loans 1,812,444 1,601,808 1,704,253 1,159,044 1,382,001 26,606, ,341 having no overdue) 1-30 days late 42,263 31, ,922 22,224 26, , days 13,716 2,195 52,543 8,834 15,116 23,247 - late days 5,370 7,323 22,672 15,083 18,403 7,905 - late days 14,018 16,357 15,592 16,068 33,245 86,254 - late days 147 8,542-7,169 11, , late >365 days late Total 1,887,958 1,667,946 1,919,982 1,228,422 1,486,264 27,009, ,801 LOAN LOSS 39,110 43,356 65,700 42,066 64, ,618 4,328 RESERVE (Total) Outstanding Number of Loans by Size: $300 9,716 11,095 8, , $301-1,000 1,235 1,185 2,322 2,153 1,469 3,752 - $1, ,864 2,212 Total 11,026 12,288 11,305 2,591 13,612 23,616 2,212 Outstanding Amount of Loans by Sector ($): Trade and 1,470,760 1,166,811 1,038, ,451 1,114,698 19,640,762 - Services Household - 99, ,295,769 - consumption (food, medical, house repair, education, etc.) Handicrafts 148, , ,001 35, ,214 4,073,358 - and Manufacturing Agriculture 230, , ,240 14, Livestock 37,938 4, , , , (small & large animals) Others , ,801 Total 1,887,958 1,667,946 1,919,982 1,228,422 1,486,264 27,009, ,801 Key Performance Ratios Productivity Loan , Institute of Microfinance (InM) 69

70 outstanding per borrower, $ Portfolio per staff, $ Active borrowers per staff Cost per active client, $ Portfolio Quality Current repayment rate, % PAR (>30 days), % Loan loss reserve ratio, % Profitability (for the month) Yield on portfolio, % Operating expense ratio, % Operational selfsufficiency, % Other Capital adequacy ratio, % 17,009 19,395 22,857 39,627 18,578 56,743 24, % 94% 62% 99% 86% % 98.40% 2% 2% 5% 4% 5% 1.1% 0.12% 2% 3% 3% 3% 4% 2% 1.10% 3% 3% 3% 2% 3% 3.3% 3.0% 4% 3% 5% 1% 2% 2.0% 2.6% 69% 66% 56% 85% 125% 113.2% 113.7% -12% 15% 0% 17% 12% 29.1% 97.1% 70 State of Microfinance in Afghanistan

71 Table 1.5 Outreach Indicator (December 2006) Dec-06 Outreach Overall Provinces 21 Districts 93 Active Clients 280,914 Active borrowers 241,495 Client dropout (cumulative) 112,715 No. of loans disbursed (cumulative) 540,797 No. of loans outstanding 241,495 Amount of loans disbursed, $ (cumulative ) 139,409,485 Gross Loans outstanding, $ 51,653,493 Client Savings outstanding, $ 4,990,573 Outreach - Vulnerable Section Women Clients 206,849 Active women borrowers 172,584 Number of widow clients 4,177 Number of disabled clients 196 Number of returnees 11,316 Women as % of Total Clients 74% MFI Resources employed Branches 215 Field staff (loan officers, credit officers, promoters) - Total staff 3,047 Institute of Microfinance (InM) 71

72 Table 1.6 Key Performance Ratios (December 2006) Key Performance Ratios Productivity Loan outstanding per borrower, $ 214 Portfolio per staff, $ 16,952 Active borrowers per staff 79 Loan portfolio to total assets, % 87% Portfolio Quality Current repayment rate, % 93% PAR (>30 days), % 1.16% Loan loss reserve ratio, % 1.6% Profitability (for the month) Yield on portfolio, % 0.0% Operating expense ratio, % 2.6% Operational self-sufficiency, % 0.0% Financial Capital adequacy ratio, % 0.0% Outreach (for the month) Dropout ratio, % 0.0% 72 State of Microfinance in Afghanistan

73 Table 1.7 Portfolio Summary (December 2006) Dec-06 LOAN PORTFOLIO Principal Amount due (demand), $ 8,537,369 Principal Amount received, $ 7,942,375 Principal prepaid, $ 2,125 Principal installment overdue, $ 597,119 Number of loans overdue 13,684 Number of loans written-off 3 Amount of loans written-off, $ 131 PORTFOLIO AGEING (Number of Loans) Current (loans having no overdue) 227, days late 4, days late days late days late days late 969 >365 days late 6,198 Total 241,495 PORTFOLIO AGEING (Principal Balances, $) Current (loans having no overdue) 459, days late 45, days late 3, days late days late days late >365 days late - Total 509, LOAN LOSS RESERVE Current - 1% 4, days late - 10% 4, days late - 25% days late - 50% days late - 75% days late - 90% Institute of Microfinance (InM) 73

74 >365 days late - 100% - Total 10, LOAN PORTFOLIO DIVERSIFICATON Outstanding No of Loans by Size $100 6,693 $ ,621 $ ,525 $501-1,000 16,073 $1,000 7,583 Total 241,495 Outstanding No of Loans by Sector: Trade and Services 161,597 Handicrafts and Manufacturing 34,691 Agriculture 21,691 Livestock (small & large animals) 20,386 Others 3,130 Total 241,495 Outstanding Balances of Loans by Sector ($): Trade and Services 28,589, Handicrafts and Manufacturing 6,680, Agriculture 5,497, Livestock (small & large animals) 9,628, Others 1,257, Total 51,653, Outstanding Loans under Murabaha (No) 26,575 Outstanding Amount under Murabaha ($) 6,142,148 Outstanding Loans under Microleasing (No) 212 Outstanding Amount under Microleasing ($) 164, State of Microfinance in Afghanistan

75 Table 1.8 Outreach Indicator (April 2006) Apr-06 Outreach Overall Provinces 19 Districts 19 Active Clients 192,610 Active borrowers 160,744 Client dropout (cumulative) 69,616 No. of loans disbursed (cumulative) 321,644 No. of loans outstanding 160,744 Amount of loans disbursed, $ (cumulative ) 71,536,818 Gross Loans outstanding, $ 27,623,763 Client Savings outstanding, $ 2,956,353 Outreach - Vulnerable Section Women Clients 139,466 Active women borrowers 118,952 Number of widow clients - Number of disabled clients 218 Number of returnees 3,114 Women as % of Total Clients 72% MFI Resources employed Branches 157 Field staff (loan officers, credit officers, promoters) Total staff 2, Institute of Microfinance (InM) 75

76 Table 1.9 Key Performance Ratios (April 2006) Key Performance Ratios Productivity Loan outstanding per borrower, $ 172 Portfolio per staff, $ 12,094 Active borrowers per staff 70 Loan portfolio to total assets, % - Portfolio Quality Current repayment rate, % 98.37% PAR (>30 days), % 1.23% Loan loss reserve ratio, % 1.45% Profitability (for the month) Yield on portfolio, % 0.8% Operating expense ratio, % 4.1% Operational self-sufficiency, % - Financial Capital adequacy ratio, % - Outreach (for the month) Dropout ratio, % - 76 State of Microfinance in Afghanistan

77 Table 1.10 Portfolio Summary (April 2006) Apr-06 LOAN PORTFOLIO Principal Amount due (demand), $ 20,945,495 Principal Amount received, $ 20,611,293 Principal prepaid, $ 6,477 Principal installment overdue, $ 340,679 Number of loans overdue 11,526 Number of loans written-off 76 Amount of loans written-off, $ 8,771 PORTFOLIO AGEING (Number of Loans) Current (loans having no overdue) 149, days late 2, days late 1, days late days late days late 633 >365 days late 5,052 Total 160,744 PORTFOLIO AGEING (Principal Balances, $) Current (loans having no overdue) 800, days late 17, days late days late days late days late - >365 days late - Total 817, LOAN LOSS RESERVE Current - 1% 8, days late - 10% 1, days late - 25% days late - 50% days late - 75% days late - 90% - Institute of Microfinance (InM) 77

78 >365 days late - 100% - Total 9, LOAN PORTFOLIO DIVERSIFICATON Outstanding No of Loans by Size: $100 12,242 $ ,887 $ ,674 $501-1,000 5,399 $1,000 2,542 Total 160,744 Outstanding No of Loans by Sector: Trade and Services 101,334 Handicrafts and Manufacturing 30,578 Agriculture 13,043 Livestock (small & large animals) 13,539 Others 2,250 Total 5,879 Outstanding Balances of Loans by Sector ($): Trade and Services 14,307, Handicrafts and Manufacturing 4,434, Agriculture 3,097, Livestock (small & large animals) 5,203, Others 567, Total 27,610,219 Outstanding Loans under Murabaha (No) 1,121 Outstanding Amount under Murabaha ($) 346,055 Outstanding Loans under Microleasing (No) 96 Outstanding Amount under Microleasing ($) 92, State of Microfinance in Afghanistan

79 List of Appendix Tables 1 Ariana Financial Services (AFS) Table Outreach and Impact Table Financial Indicators 3 Afghanistan Rural Microcredit Programme (ARMP) Table Outreach and Impact Table Financial Indicators 5 Child Fund Afghanistan (CFA) Table Outreach and Impact Table Financial Indicators 7 The First MicroFinance Bank(FMFB) Table Outreach and Impact Table Financial Indicators 9 Micro Finance Agency for Development (MoFAD) Table Outreach and Impact Table Financial Indicators 11 Parwaz Microfinance Institution Table Outreach and Impact Table Financial Indicators 13 World Council of Credit Unions (WOCCU) Table Outreach and Impact Table Financial Indicators 2 Afghanistan Microfinance Institution (AMFI) Table Outreach and Impact Table Financial Indicators 4 Bangladesh Rural Advancement Committee (BRAC) Table Outreach and Impact Table Financial Indicators 6 Foundation for International Community Assistance (FINCA) Table Outreach and Impact Table Financial Indicators 8 Microfinance Agency for Development and Rehabilitation of Afghan Communities (MADRAC) 10 OXUS Table Outreach and Impact Table Financial Indicators Table Outreach and Impact Table Financial Indicators 12 Sunduq (Khadamati Mahally Sunduq) Table Outreach and Impact Table Financial Indicators 14 Women for Women International (WWI) Table Outreach and Impact Table Financial Indicators Institute of Microfinance (InM) 79

80 AFS (Ariana Financial Services (Mercy Corps) Table Outreach & Impact OUTREACH & IMPACT OUTREACH 31/03/08 31/12/07 31/03/07 31/03/06 31/03/05 31/03/04 INDICATORS Outreach Indicators Number of Personnel n/a Loan Number of Active 10,312 9,292 6,217 4,328 1,911 2,873 Borrowers Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a n/a 37.00% 13.00% Woman Borrowers (%) 70.50% 73.10% 85.50% n/a 67.50% 24.10% Average Loan Balance 80 State of Microfinance in Afghanistan

81 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/12/07 31/03/07 31/03/06 31/03/05 31/03/04 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 2,514,016 1,948, , , , ,897 Total Assets (in US$) 3,721,572 3,514,419 3,232, , , ,047 Savings (in US$) Total Equity (in US$) 576, , ,711 19, , ,047 Financing Structure Capital / Asset Ratio 15.48% 11.11% 16.45% 2.86% 37.68% 49.86% Debt / Equity Ratio % % % 3,393.56% % % Deposits to Loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total 67.55% 55.46% 28.64% 80.26% 42.92% 45.29% Assets Overall Financial Performance Return on Assets (%) -5.95% n/a -6.14% % % n/a Return on Equity (%) % n/a % % % n/a Operational Self-Sufficiency 73.88% 79.26% 71.36% 33.94% 20.69% 10.08% (%) Revenues Financial Revenue Ratio (%) 16.83% n/a 15.30% 25.85% 16.66% n/a Profit Margin (%) % % % % % % Expenses Total Expense Ratio (%) 22.78% n/a 21.44% 76.16% 80.52% n/a Financial Expense Ratio (%) 3.51% n/a 3.81% 5.17% 2.35% n/a Loan Loss Provision Expense 0.82% n/a 0.73% 0.00% 1.35% n/a Ratio (%) Operating Expense Ratio (%) 18.45% n/a 16.90% 70.99% 76.81% n/a Efficiency Operating Expense / Loan 37.30% n/a 45.09% % % n/a Portfolio (%) Cost per Borrower 77.6 n/a n/a Productivity Borrowers per Staff member n/a Savers per Staff member n/a 0 0 Risk Portfolio at Risk > 30 days 0.73% 0.67% 1.66% n/a 1.10% 7.90% Ratio (%) Loan Loss Reserve Ratio (%) 1.92% 2.21% 2.54% 1.72% 3.78% 0.00% Risk Coverage Ratio (%) % % % n/a % 0.00% Write Off Ratio (%) 0.22% Institute of Microfinance (InM) 81

82 AMFI (Afghanistan Microfinance Institution) (CHF International) Table Outreach & Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 30/09/05 30/09/04 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 4,811 3,362 1, Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a 78.00% 50.00% Woman Borrowers (%) 35.90% 23.20% 30.70% 34.20% Average Loan Balance per n/a n/a n/a n/a Borrower/ GNI per Capita (%) Saving Number of Savers Average Savings Balance per n/a n/a n/a n/a Saver (US$) Average Savings Balance per n/a n/a n/a n/a Saver/ GNI per Capita (%) Depth of Outreach Clients below poverty line (%) n/a 90 % 75 % 75 % Clients in bottom half of the n/a 30 % n/a n/a population below the poverty line (%) Clients in households earning less n/a 90 % 40 % 40 % than US$1/day per household member (%) Clients starting microenterprise for the first time (%) n/a % 2.00 % 2.00 % 82 State of Microfinance in Afghanistan

83 FINANCIAL INFORMATION IN US$ Exchange Rate used for Conversion 1 USD/USD Table Financial Indicators 31/03/08 31/03/07 30/09/05 30/09/04 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 1,103,260 1,178, , ,200 Total Assets (in US$) 2,427,660 2,506, , ,189 Savings (in US$) Total Equity (in US$) 236, ,714 2,791 57,189 Financing Structure Capital / Asset Ratio 9.76% 9.25% 0.43% 16.96% Debt / Equity Ratio % % 23,043.86% % Deposits to Loans 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 45.45% 47.03% 82.30% 32.39% Overall Financial Performance Return on Assets (%) % n/a % n/a Return on Equity (%) % n/a -2,300.61% n/a Operational Self-Sufficiency (%) 46.90% 43.87% 6.94% 3.91% Revenues Financial Revenue Ratio (%) 16.18% n/a 10.47% n/a Profit Margin (%) % % -1,340.73% -2,455.00% Expenses Total Expense Ratio (%) 34.50% n/a % n/a Financial Expense Ratio (%) 4.26% n/a 5.64% n/a Loan Loss Provision Expense Ratio (%) 3.30% n/a 2.16% n/a Operating Expense Ratio (%) 26.93% n/a % n/a Efficiency Operating Expense / Loan Portfolio (%) 58.23% n/a % n/a Cost per Borrower n/a n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 16.48% 0.00% 95.57% 0.00% Loan Loss Reserve Ratio (%) 9.52% 2.00% 2.00% 9.82% Risk Coverage Ratio (%) 57.78% n/a 2.09% n/a Write Off Ratio (%) 0.00% n/a 0.00% n/a Institute of Microfinance (InM) 83

84 ARMP (Afghanistan Rural Microcredit Programme (Aga Khan Development Network)) OUTREACH & IMPACT Table Outreach and Impact OUTREACH INDICATORS 31/12/07 31/12/06 Outreach Indicators 1/12/05 31/12/04 31/12/03 1/12/02 Number of Personnel Loan Number of Active Borrowers 30,719 30,346 15,670 4, Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a 1.00% n/a n/a Woman Borrowers (%) 18.30% 19.00% 11.40% 5.10% 1.00% Average Loan Balance per Borrower/ GNI per Capita (%) n/a n/a n/a n/a n/a 84 State of Microfinance in Afghanistan

85 FINANCIAL INFORMATION IN US$ Exchange Rate used for Conversion 1 USD/USD Table Financial Indicators 31/12/07 31/12/06 31/12/05 31/12/04 31/12/03 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 20,690,527 16,889,524 8,430,793 3,072,903 78,833 Total Assets (in US$) 30,418,876 20,701,493 9,920,267 3,708, ,967 Savings (in US$) Total Equity (in US$) 10,969,468 9,011,104 5,843,409 3,341,472 (34,162) Financing Structure Capital / Asset Ratio 36.06% 43.53% 58.90% 90.11% n/a Debt / Equity Ratio % % 69.77% 10.97% n/a Deposits to Loans 0.00% 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 68.02% 81.59% 84.99% 82.87% 42.16% Overall Financial Performance Return on Assets (%) 2.78% 2.42% -3.76% -0.34% n/a Return on Equity (%) 7.12% 4.99% -5.58% -0.40% n/a Operational Self-Sufficiency (%) % % 83.75% 98.95% 14.68% Revenues Financial Revenue Ratio (%) 19.70% 23.16% 19.38% 31.85% n/a Profit Margin (%) 14.13% 10.45% % -1.06% % Expenses Total Expense Ratio (%) 16.92% 20.74% 23.14% 32.18% n/a Financial Expense Ratio (%) 2.48% 2.46% 1.62% 0.25% n/a Loan Loss Provision Expense Ratio (%) 3.35% 3.98% 1.78% 1.29% n/a Operating Expense Ratio (%) 11.09% 14.30% 19.74% 30.65% n/a Efficiency Operating Expense / Loan Portfolio (%) 15.09% 17.30% 23.38% 37.88% n/a Cost per Borrower Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 5.64% 2.27% n/a 0.00% 0.00% Loan Loss Reserve Ratio (%) 7.90% 4.60% 2.00% 2.00% 2.00% Risk Coverage Ratio (%) % % n/a n/a n/a Write Off Ratio (%) 0.00% 0.29% 0.24% 0.00% n/a Institute of Microfinance (InM) 85

86 BRAC - AFG (BRAC Afghanistan) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/12/05 31/12/04 31/12/03 31/12/02 Outreach Indicators Number of Personnel 1,953 1,868 1, Loan Number of Active Borrowers 140, ,625 87,153 55,572 15, Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a 99.00% 99.00% % Woman Borrowers (%) % 92.00% 95.90% 99.30% 99.10% % Average Loan Balance per n/a n/a n/a n/a n/a n/a Borrower/ GNI per Capita (%) Saving Amount of Savings (US$) 5,596,627 5,744,960 4,649,122 2,262,429 Depth of Outreach Clients below poverty line (%) Clients in bottom half of the population below the poverty line (%) Clients in households earning less than US$1/day per household member (%) Clients starting microenterprise for the first time (%) n/a n/a n/a 98 % 98 % 99 % n/a n/a n/a 3 % 1 % 0 % n/a n/a n/a 99 % 99 % 99 % n/a n/a n/a % % % 86 State of Microfinance in Afghanistan

87 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/12/05 31/12/04 31/12/03 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 26,341,011 20,780,335 7,463,597 3,585, ,975 Total Assets (in US$) 41,276,831 31,233,183 14,508,37 5,503,113 1,273,115 6 Savings (in US$) Total Equity (in US$) 891,338 3,147,235 1,960,039 1,017,260 48,226 Financing Structure Capital / Asset Ratio 2.16% 10.08% 13.51% 18.49% 3.79% Debt / Equity Ratio 4,530.88% % % % 2,539.89% Deposits to Loans 0.00% 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 63.82% 66.53% 51.44% 65.16% 61.81% Overall Financial Performance Return on Assets (%) -3.57% n/a % % % Return on Equity (%) % n/a % % - 1,146.33% Operational Self-Sufficiency (%) 85.16% 65.87% 50.60% 23.02% 23.27% Revenues Financial Revenue Ratio (%) 20.51% n/a 18.57% 15.83% 11.43% Profit Margin (%) % % % % % Expenses Total Expense Ratio (%) 24.08% n/a 36.69% 68.75% 49.09% Financial Expense Ratio (%) 4.16% n/a 3.85% 5.66% 1.19% Loan Loss Provision Expense Ratio 2.58% n/a 2.61% 3.53% 3.86% (%) Operating Expense Ratio (%) 17.34% n/a 30.23% 59.55% 44.04% Efficiency Operating Expense / Loan Portfolio 26.69% n/a 54.75% 92.28% 80.13% (%) Cost per Borrower 45.1 n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 6.42% 27.97% 4.69% 0.21% 0.00% Loan Loss Reserve Ratio (%) 6.05% 5.52% 4.22% 4.18% 3.86% Risk Coverage Ratio (%) 94.16% 19.73% 89.99% 1,981.92% n/a Write Off Ratio (%) 2.07% n/a 1.74% 0.00% 0.00% Institute of Microfinance (InM) 87

88 CFA (Child Fund Afghanistan (CCF)) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 20,380 10,430 7,100 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a Woman Borrowers (%) 53.50% 64.80% 68.20% Average Loan Balance per Borrower/ n/a n/a n/a GNI per Capita (%) Saving Total Amount of Savings (US$) 270, , State of Microfinance in Afghanistan

89 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/03/06 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 3,541,841 1,743, ,926 Total Assets (in US$) 5,195,352 1,829, ,914 Savings (in US$) Total Equity (in US$) 1,144, , ,989 Financing Structure Capital / Asset Ratio 22.02% 44.13% 85.11% Debt / Equity Ratio % % 17.50% Deposits to Loans 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 68.17% 95.28% 92.86% Overall Financial Performance Return on Assets (%) 3.88% 3.05% n/a Return on Equity (%) 13.96% 5.21% n/a Operational Self-Sufficiency (%) % % % Revenues Financial Revenue Ratio (%) 20.27% 26.77% n/a Profit Margin (%) 23.54% 11.38% 5.73% Expenses Total Expense Ratio (%) 15.50% 23.72% n/a Financial Expense Ratio (%) 2.81% 1.25% n/a Loan Loss Provision Expense Ratio 1.48% 6.29% n/a (%) Operating Expense Ratio (%) 11.21% 16.18% n/a Efficiency Operating Expense / Loan Portfolio 14.90% 17.13% n/a (%) Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 2.12% 6.22% 0.36% Loan Loss Reserve Ratio (%) 3.96% 5.07% 0.00% Risk Coverage Ratio (%) % 81.56% 0.00% Write Off Ratio (%) 0.00% 0.00% n/a Institute of Microfinance (InM) 89

90 FINCA AFG (FINCA Afghanistan) OUTREACH & IMPACT Table Outreach and Impact OUTREACH INDICATORS 31/12/07 31/12/06 31/12/05 31/08/04 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 63,571 27,570 10,092 2,864 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a 73.00% % Woman Borrowers (%) 47.50% 25.10% 28.90% 33.40% Average Loan Balance per Borrower/ GNI n/a n/a n/a n/a per Capita (%) Saving Number of Savers Average Savings Balance per Saver (US$) n/a n/a n/a n/a Average Savings Balance per Saver/ GNI per Capita (%) Depth of Outreach n/a n/a n/a n/a Clients below poverty line (%) n/a n/a 30 % 30 % Clients in bottom half of the population below the poverty line (%) n/a n/a 0 % 0 % Clients in households earning less than US$1/day per household member (%) Clients starting microenterprise for the first time (%) n/a n/a 60 % 60 % n/a n/a 0.00 % 0.00 % 90 State of Microfinance in Afghanistan

91 Table Financial Indicators INANCIAL INFORMATION IN US$ 31/12/07 31/12/06 31/12/05 31/08/04 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 11,815,480 6,144,048 1,389, ,890 Total Assets (in US$) 22,603,830 8,958,157 2,179, ,343 Savings (in US$) Total Equity (in US$) 7,961,283 3,981, , ,332 Financing Structure Capital / Asset Ratio 35.22% 44.45% 24.31% 50.22% Debt / Equity Ratio % % % 99.12% Deposits to Loans 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 52.27% 68.59% 63.76% 53.00% Overall Financial Performance Return on Assets (%) % % n/a n/a Return on Equity (%) % % n/a n/a Operational Self-Sufficiency (%) 60.06% 18.26% 20.39% 13.50% Revenues Financial Revenue Ratio (%) 25.24% 16.18% n/a n/a Profit Margin (%) % % % % Expenses Total Expense Ratio (%) 42.02% 88.65% n/a n/a Financial Expense Ratio (%) 2.47% 3.62% n/a n/a Loan Loss Provision Expense Ratio 3.86% 2.25% n/a n/a (%) Operating Expense Ratio (%) 35.69% 82.78% n/a n/a Efficiency Operating Expense / Loan Portfolio 62.72% % n/a n/a (%) Cost per Borrower n/a n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 7.39% 0.34% 5.00% 0.00% Loan Loss Reserve Ratio (%) 5.96% 1.48% 3.20% 1.00% Risk Coverage Ratio (%) 80.71% % 64.06% n/a Write Off Ratio (%) 0.84% 2.09% n/a n/a Institute of Microfinance (InM) 91

92 FMFB - AFG (The First MicroFinanceBank - Afghanistan) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/12/07 31/12/06 31/12/05 31/12/04 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 23,616 16,955 8,302 2,111 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a 0.00% 0.00% Woman Borrowers (%) 26.70% 16.10% 14.80% 13.10% Average Loan Balance per Borrower/ GNI per Capita (%) n/a n/a n/a n/a Saving Number of Savers 9,426 2, Average Savings Balance per Saver (US$) Total Amount of Savings (US$) 7,700,812 4,835,811 4,880,510 95, State of Microfinance in Afghanistan

93 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/12/07 31/12/06 31/12/05 31/12/04 Exchange Rate used for Conversion AFN/USD AFN/USD AFN/USD 43 AFN/USD Balance Sheet Gross Loan Portfolio (in US$) 27,164,553 16,866,704 7,463,105 2,350,833 Total Assets (in US$) 62,720,237 33,709,260 23,426,688 10,851,496 Savings (in US$) 4,862,951 4,880,510 95, ,351 Total Equity (in US$) 8,213,263 6,944,586 5,911,993 5,148,875 Financing Structure Capital / Asset Ratio 13.10% 20.60% 25.24% 47.45% Debt / Equity Ratio % % % % Deposits to Loans 17.90% 28.94% 1.27% 4.31% Deposits to Total Assets 7.75% 14.48% 0.41% 0.93% Gross Loan Portfolio / Total Assets 43.31% 50.04% 31.86% 21.66% Overall Financial Performance Return on Assets (%) 1.91% 1.24% -3.54% n/a Return on Equity (%) 12.16% 5.52% % n/a Operational Self-Sufficiency (%) % % 86.27% 14.06% Revenues Financial Revenue Ratio (%) 18.17% 18.88% 15.46% n/a Profit Margin (%) 19.28% 16.34% % % Expenses Total Expense Ratio (%) 14.66% 15.79% 17.92% n/a Financial Expense Ratio (%) 1.59% 1.22% 0.52% n/a Loan Loss Provision Expense Ratio 1.49% 1.09% 0.56% n/a (%) Operating Expense Ratio (%) 11.58% 13.49% 16.84% n/a Efficiency Operating Expense / Loan Portfolio 25.36% 31.68% 58.83% n/a (%) Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 1.05% 0.00% 0.00% 0.00% Loan Loss Reserve Ratio (%) 4.25% 2.53% 1.55% 1.00% Risk Coverage Ratio (%) % n/a n/a n/a Write Off Ratio (%) 0.00% 0.00% 0.00% n/a Institute of Microfinance (InM) 93

94 MADRAC (Microfinance Agency for the Development and Rehabilitation of Afghan Communities) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 15,358 8, Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a Woman Borrowers (%) 50.20% 46.90% 42.20% Average Loan Balance per Borrower/ GNI per Capita (%) n/a n/a n/a Saving Number of Savers 171, ,924 0 Average Savings Balance per Saver (US$) Average Savings Balance per Saver/ GNI per Capita (%) n/a n/a n/a n/a n/a n/ 94 State of Microfinance in Afghanistan

95 FINANCIAL INFORMATION IN US$ Table Financial Indicators Exchange Rate used for Conversion 1 USD/USD Balance Sheet 31/03/08 31/12/07 31/03/07 31/03/06 1 USD/USD 1 USD/USD 1 USD/USD Gross Loan Portfolio (in US$) 2,662,430 2,220,351 1,195,027 66,207 Total Assets (in US$) 3,562,134 3,695,886 2,003, ,805 Savings (in US$) Total Equity (in US$) 26, , ,555 (68,635) Financing Structure Capital / Asset Ratio 0.74% 10.22% 6.77% n/a Debt / Equity Ratio 13,343.03% % 1,377.85% n/a Deposits to Loans 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 74.74% 60.08% 59.65% 35.63% Overall Financial Performance Return on Assets (%) % n/a % n/a Return on Equity (%) % n/a -1,222.96% n/a Operational Self-Sufficiency (%) 43.67% 49.66% 24.53% 24.53% Revenues Financial Revenue Ratio (%) 18.53% n/a 12.15% n/a Profit Margin (%) % % % % Expenses Total Expense Ratio (%) 42.44% n/a 49.54% n/a Financial Expense Ratio (%) 4.00% n/a 3.88% n/a Loan Loss Provision Expense Ratio (%) 2.17% n/a 1.17% n/a Operating Expense Ratio (%) 36.27% n/a 44.50% n/a Efficiency Operating Expense / Loan Portfolio (%) 52.33% n/a 77.23% n/a Cost per Borrower 85.5 n/a n/a Productivity Borrowers per Staff member 96 n/a Savers per Staff member 0 n/a 0 0 Risk Portfolio at Risk > 30 days Ratio (%) 2.52% 2.22% 0.13% 0.00% Loan Loss Reserve Ratio (%) 2.77% 2.30% 1.12% 1.00% Risk Coverage Ratio (%) % % % n/a Write Off Ratio (%) 0.00% n/a 0.00% n/a Institute of Microfinance (InM) 95

96 MoFAD (Micro Finance Agency for Development (CARE)) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 30/06/05 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 9,069 4,499 2,501 1,978 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a 95.00% n/a Woman Borrowers (%) % % % % Average Loan Balance per Borrower/ n/a n/a n/a n/a GNI per Capita (%) Saving Amount of Savings (US$) 178, , Clients below poverty line (%) n/a n/a 80 % 80 % Clients in bottom half of the n/a n/a 70 % 70 % population below the poverty line (%) Clients in households earning less than n/a n/a 70 % 70 % US$1/day per household member (%) Clients starting microenterprise for the first time (%) n/a n/a % % 96 State of Microfinance in Afghanistan

97 FINANCIAL INFORMATION IN US$ Table Financial Indicators Exchange Rate used for Conversion 1 USD/USD Balance Sheet 31/03/08 31/03/07 31/03/06 30/06/05 1 USD/USD 1 USD/USD 1 USD/USD Gross Loan Portfolio (in US$) 1,875, , , ,838 Total Assets (in US$) 2,887,012 2,097, , ,679 Savings (in US$) Total Equity (in US$) 6,142 (12,724) (124,108) 156,679 Financing Structure Capital / Asset Ratio 0.21% n/a n/a 34.84% Debt / Equity Ratio 46,904.43% n/a n/a % Deposits to Loans 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 64.96% 46.09% 35.75% 26.87% Overall Financial Performance Return on Assets (%) % % n/a n/a Return on Equity (%) 9,517.84% % n/a n/a Operational Self-Sufficiency (%) 53.52% 20.17% 4.90% 5.73% Revenues Financial Revenue Ratio (%) 14.47% 10.81% n/a n/a Profit Margin (%) % % -1,939.67% -1,646.51% Expenses Total Expense Ratio (%) 27.04% 53.61% n/a n/a Financial Expense Ratio (%) 3.37% 2.94% n/a n/a Loan Loss Provision Expense Ratio (%) 0.79% 0.59% n/a n/a Operating Expense Ratio (%) 22.88% 50.08% n/a n/a Efficiency Operating Expense / Loan Portfolio (%) 40.13% % n/a n/a Cost per Borrower n/a n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 0.65% 0.53% 3.03% 7.00% Loan Loss Reserve Ratio (%) 1.84% 1.53% 4.12% 0.00% Risk Coverage Ratio (%) % % % 0.00% Write Off Ratio (%) 0.00% 0.00% n/a n/a Institute of Microfinance (InM) 97

98 OXUS AFG (OXUS Afghanistan) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 13,406 5, Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a 93.30% 99.50% Woman Borrowers (%) 52.90% 45.00% 40.10% Average Loan Balance per Borrower/ GNI per n/a n/a n/a Capita (%) Saving Number of Savers Average Savings Balance per Saver (US$) n/a n/a n/a Average Savings Balance per Saver/ GNI per Capita (%) n/a n/a n/ 98 State of Microfinance in Afghanistan

99 Table Financial Indicators INANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/03/06 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 2,568, ,522 84,437 Total Assets (in US$) 4,282,637 1,685, ,195 Savings (in US$) Total Equity (in US$) (345,435) (210,901) (187,428) Financing Structure Capital / Asset Ratio n/a n/a n/a Debt / Equity Ratio n/a n/a n/a Deposits to Loans 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 59.98% 47.78% 49.04% Overall Financial Performance Return on Assets (%) % % n/a Return on Equity (%) % % n/a Operational Self-Sufficiency (%) 58.67% 23.47% 3.31% Revenues Financial Revenue Ratio (%) 18.09% 14.75% n/a Profit Margin (%) % % -2,916.78% Expenses Total Expense Ratio (%) 30.83% 62.87% n/a Financial Expense Ratio (%) 2.93% 2.65% n/a Loan Loss Provision Expense Ratio (%) 2.86% 2.52% n/a Operating Expense Ratio (%) 25.04% 57.71% n/a Efficiency Operating Expense / Loan Portfolio (%) 44.30% % n/a Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 5.91% 3.85% 0.00% Loan Loss Reserve Ratio (%) 4.31% 3.14% 2.00% Risk Coverage Ratio (%) 72.89% 81.44% n/a Write Off Ratio (%) 0.00% 0.00% n/a Institute of Microfinance (InM) 99

100 Parwaz (Parwaz MicroFinance Institution) Table Outreach and Impact OUTREACH & IMPACT OUTREACH 31/03/08 31/03/07 31/12/05 31/12/04 31/12/03 INDICATORS Outreach Indicators Number of Personnel Loan Number of Active 14,708 7,138 2, Borrowers Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a 6,732.00% n/a % % Woman Borrowers (%) % % % % % Average Loan Balance per n/a n/a n/a n/a n/a Borrower/ GNI per Capita (%) Saving Amount of Savings (US$) 100,770 69,394 32,613 12, State of Microfinance in Afghanistan

101 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/12/05 31/12/04 31/12/03 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/US D Balance Sheet Gross Loan Portfolio (in US$) 1,623, , ,764 47,331 34,371 Total Assets (in US$) 4,049,046 1,213, ,972 63,249 40,168 Savings (in US$) Total Equity (in US$) 680, , ,194 47,881 38,609 Financing Structure Capital / Asset Ratio 16.79% 27.15% 41.68% 75.70% 96.12% Debt / Equity Ratio % % % 32.10% 4.04% Deposits to Loans 0.00% 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total 40.08% 60.57% 47.73% 74.83% 85.57% Assets Overall Financial Performance Return on Assets (%) % n/a % % n/a Return on Equity (%) % n/a % % n/a Operational Self-Sufficiency 58.03% 39.61% 15.57% 16.07% 23.72% (%) Revenues Financial Revenue Ratio (%) 14.13% n/a 15.97% 26.93% n/a Profit Margin (%) % % % % % Expenses Total Expense Ratio (%) 24.34% n/a % % n/a Financial Expense Ratio (%) 2.22% n/a 2.79% 8.51% n/a Loan Loss Provision Expense 1.52% n/a 0.62% 0.26% n/a Ratio (%) Operating Expense Ratio (%) 20.60% n/a 99.19% % n/a Efficiency Operating Expense / Loan Portfolio (%) 45.98% n/a % % n/a Cost per Borrower 49.6 n/a n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 2.40% 0.08% 0.00% 0.00% 0.00% Loan Loss Reserve Ratio (%) 2.99% 1.16% 1.00% 0.28% 0.00% Risk Coverage Ratio (%) % 1,482.61% n/a n/a n/a Write Off Ratio (%) 0.00% n/a 0.00% 0.00% n/a Institute of Microfinance (InM) 101

102 Sunduq (Khadamati Mahally Sunduq) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 11,025 3,660 3,061 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a Woman Borrowers (%) 47.50% 40.60% 38.00% Average Loan Balance per Borrower/ GNI per n/a n/a n/a Capita (%) Saving Amount of Savings (US$) 152, , State of Microfinance in Afghanistan

103 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/03/06 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 1,711, , ,899 Total Assets (in US$) 2,655,627 1,393, ,054 Savings (in US$) Total Equity (in US$) 301, ,382 (308,323) Financing Structure Capital / Asset Ratio 11.37% 71.42% n/a Debt / Equity Ratio % 40.02% n/a Deposits to Loans 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 64.43% 51.98% 60.46% Overall Financial Performance Return on Assets (%) % % n/a Return on Equity (%) % % n/a Operational Self-Sufficiency (%) 52.15% 45.33% n/a Revenues Financial Revenue Ratio (%) 23.96% 22.46% n/a Profit Margin (%) % % n/a Expenses Total Expense Ratio (%) 45.94% 49.55% n/a Financial Expense Ratio (%) 3.57% 1.72% n/a Loan Loss Provision Expense Ratio 6.17% 0.49% n/a (%) Operating Expense Ratio (%) 36.20% 47.34% n/a Efficiency Operating Expense / Loan Portfolio 60.18% 87.60% n/a (%) Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 12.78% 0.00% 0.00% Loan Loss Reserve Ratio (%) 7.73% 1.00% 1.00% Risk Coverage Ratio (%) 60.48% n/a n/a Write Off Ratio (%) Institute of Microfinance (InM) 103

104 WOCCU - AFG (WOCCU Afghanistan) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 3,009 1,869 1,261 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a Woman Borrowers (%) 35.20% 30.30% n/a Average Loan Balance per Borrower/ GNI per Capita (%) n/a n/a n/a Saving Number of Savers n/a Average Savings Balance per Saver (US$) 28 Amount of Savings (US$) 432, , State of Microfinance in Afghanistan

105 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/03/06 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 1,455, , ,322 Total Assets (in US$) 1,921, , ,908 Savings (in US$) 7,270 5,670 n/a Total Equity (in US$) 267, , ,595 Financing Structure Capital / Asset Ratio 13.93% 18.34% 27.89% Debt / Equity Ratio % % % Deposits to Loans 0.50% 0.67% n/a Deposits to Total Assets 0.38% 0.65% n/a Gross Loan Portfolio / Total Assets 75.77% 96.40% 86.00% Overall Financial Performance Return on Assets (%) -0.78% -0.05% n/a Return on Equity (%) -5.07% -0.23% n/a Operational Self-Sufficiency (%) 96.19% 99.76% 36.66% Revenues Financial Revenue Ratio (%) 19.58% 21.30% n/a Profit Margin (%) -3.96% -0.24% % Expenses Total Expense Ratio (%) 20.36% 21.35% n/a Financial Expense Ratio (%) 5.02% 6.19% n/a Loan Loss Provision Expense Ratio (%) 1.97% 2.86% n/a Operating Expense Ratio (%) 13.36% 12.30% n/a Efficiency Operating Expense / Loan Portfolio (%) 16.25% 13.30% n/a Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member n/a 8 n/a Risk Portfolio at Risk > 30 days Ratio (%) 3.07% 4.02% n/a Loan Loss Reserve Ratio (%) 2.16% 2.77% 0.67% Risk Coverage Ratio (%) 70.23% 68.89% n/a Write Off Ratio (%) 2.04% 0.00% n/a Institute of Microfinance (InM) 105

106 WWI - AFG (Women for Women Afghanistan) Table Outreach and Impact OUTREACH & IMPACT OUTREACH INDICATORS 31/03/08 31/03/07 31/03/06 31/03/05 Outreach Indicators Number of Personnel Loan Number of Active Borrowers 14,511 10,773 3,442 1,414 Average Loan Balance per Borrower (US$) Loans below US$300 (%) n/a n/a n/a n/a Woman Borrowers (%) % % % % Average Loan Balance per Borrower/ GNI per Capita (%) n/a n/a n/a n/a Saving Number of Savers Average Savings Balance per Saver (US$) n/a n/a n/a n/a Average Savings Balance per Saver/ GNI per Capita (%) n/a n/a n/a n/a 106 State of Microfinance in Afghanistan

107 Table Financial Indicators FINANCIAL INFORMATION IN US$ 31/03/08 31/03/07 31/03/06 31/03/05 Exchange Rate used for Conversion 1 USD/USD 1 USD/USD 1 USD/USD 1 USD/USD Balance Sheet Gross Loan Portfolio (in US$) 1,742,004 1,266, , ,037 Total Assets (in US$) 3,008,004 2,003, , ,050 Savings (in US$) Total Equity (in US$) 184,496 1,489 (327,937) 1,455 Financing Structure Capital / Asset Ratio 6.13% 0.07% n/a 0.41% Debt / Equity Ratio 1,530.39% n/a n/a 24,164.60% Deposits to Loans 0.00% 0.00% 0.00% 0.00% Deposits to Total Assets 0.00% 0.00% 0.00% 0.00% Gross Loan Portfolio / Total Assets 57.91% 63.23% 65.49% 44.20% Overall Financial Performance Return on Assets (%) 0.06% % % n/a Return on Equity (%) 1.48% % % n/a Operational Self-Sufficiency (%) % 43.59% 16.59% 4.91% Revenues Financial Revenue Ratio (%) 23.53% 22.05% 20.78% n/a Profit Margin (%) 0.23% % % -1,937.34% Expenses Total Expense Ratio (%) 23.47% 50.58% % n/a Financial Expense Ratio (%) 3.77% 5.34% 8.55% n/a Loan Loss Provision Expense Ratio (%) 2.02% 0.71% 0.66% n/a Operating Expense Ratio (%) 17.68% 44.53% % n/a Efficiency Operating Expense / Loan Portfolio (%) 29.45% 69.83% % n/a Cost per Borrower n/a Productivity Borrowers per Staff member Savers per Staff member Risk Portfolio at Risk > 30 days Ratio (%) 1.75% 0.11% 0.15% 0.00% Loan Loss Reserve Ratio (%) 2.50% 1.09% 1.14% 1.03% Risk Coverage Ratio (%) % % % n/a Write Off Ratio (%) 1.39% 0.02% 0.00% n/a Institute of Microfinance (InM) 107

108 December 2008 (US Dollars) Name of MFI Number of branches Staff Number of borrowers Loan disbursed ($) Loan outstanding ($) Loan overdue ($) Member savings ($) Male Female Ariana Financial Services (AFS) ,528 7,653 13,848,980 3,521, , Public deposits (If any) Afghanistan Microfinance Institution (AMFI) ,333 1,563 7,804, ,612 49, Afghanistan Rural Microcredit Programme (ARMP) ,189 2,716 85,534,772 15,352, , Bangladesh Rural Advancement Committee (BRAC) 163 1,985 25, , ,604,000 27,310,454 1,240,149 5,596,627 - Child Fund Afghanistan (CFA) ,198 9,947 14,556,373 3,366, , ,464 Foundation for International Community Assistance (FINCA) ,270 20,229 62,690,537 5,330, , The First MicroFinance Bank (FMFB) ,526 13, ,179,515 35,046, ,087 7,700,812 Microfinance Agency for Development and Rehabilitation of Afghan (MADRAC) Micro Finance Agency for Development (MoFAD) ,399 7,749 9,694,130 2,433, , , ,156 9,224,539 2,231,890 12, ,448 - OXUS ,002 7,392 13,834,337 3,763,479 75, Parwaz Microfinance Institution ,180 1,959, , ,770-9,468,140 Sunduq (Khadamati Mahally Sunduq) ,837 4,694 7,271,493 1,476,414 74, ,754 - World Council of Credit Unions (WOCCU) ,744 2,796 8,832,510 2,542, , ,088 - Women for Women International (WWI) ,549 10,718,660 1,273,196 42, State of Microfinance in Afghanistan